N e w R i v e r R E I T p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 7 CONVENIENCE‑LED COMMUNITY‑FOCUSED Annual Report and Accounts 2017 INVESTING IN CONVENIENCE & COMMUNITY TO DELIVER GROWING AND SUSTAINABLE RETURNS NewRiver is one of the UK’s largest REITs focused on the dynamic convenience‑led retail and leisure sectors. Our high quality retail and leisure portfolio caters for the weekly needs of millions of UK wide shoppers, in turn creating desirable and profitable trading opportunities for our retail and leisure occupiers. We understand that affordability for occupiers means sustainability for our business. CONTENTS Strategic Report Financial Highlights Our Marketplace Our Business at a Glance Chairman’s Review Chief Executive’s Strategic Review Our Business Model Our Strategy Our KPIs Property Review Financial Review Risk Management Sustainability Review 01 02 10 12 14 18 20 22 26 48 55 58 NewRiver REIT plc Annual Report and Accounts 2017 Governance Board of Directors Corporate Governance Report Audit Committee Report Nomination Committee Report Remuneration Committee Report Directors’ Report Financial Statements Independent Auditor’s Report Consolidated Income Statement Consolidated Balance Sheet Consolidated Cash Flow Statement Notes to the financial statements Glossary Other information 64 66 72 76 78 102 106 1 14 116 117 119 151 IBC Visit our website to discover more about our business: www.nrr.co.uk FINANCIAL HIGHLIGHTS Strong track record Gross income (proportionally consolidated) £106.7m Funds From Operations1 £58.2m 106.7 +52%* 74.9 46.7 58.2 47.1 +83%* 20.9 19.9 25.2 FY13 FY14 FY15 FY16 FY17 5.2 FY13 9.5 FY14 FY15 FY16 FY17 FFO per share 24.9p Dividend per share2 23.0p +11%* 26.6 24.9 19.8 16.3 15.7 16.0 16.0 +9%* 17.0 4.25 4.25 4.25 4.25 18.5 4.75 4.75 4.5 4.5 23.0 3.0 5.0 5.0 5.0 5.0 FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Assets under management IFRS net assets £1.3bn £684.5m 1.3 689.9 684.5 +35%* 1.1 0.8 0.6 0.4 +71%* 339.7 239.6 FY13 FY14 FY15 FY16 FY17 79.8 FY13 FY14 FY15 FY16 FY17 * Compound annual growth rate 1. Previously this measure was referred to as EPRA adjusted earnings 2. FY17 includes 3.0 pence per share of special dividend NewRiver REIT plc Annual Report and Accounts 2017 1 STRATEGIC REPORT OUR MARKETPLACE CONVENIENCE AND VALUE RETAILERS DOMINATED 2016 STORE OPENINGS, ACCOUNTING FOR 69% OF ALL NEW STORES, WITH GROWTH EXPECTED TO CONTINUE Source: GlobalData 2 NewRiver REIT plc Annual Report and Accounts 2017 NEWRIVER’S POSITION OUR TOP 10 RETAILERS INCLUDES A STRONG MIX OF VALUE AND CONVENIENCE FOCUS % NewRiver rent 2.6% 2.4% 2.4% 2.4% 2.0% 2.0% 1.8% 1.7% 1.7% 1.7% Source: Company NewRiver REIT plc Annual Report and Accounts 2017 3 OUR MARKETPLACE IN-STORE SPEND IS FORECAST TO GROW +10% BY 2021, DRIVEN BY NON- DISCRETIONARY & CONVENIENCE SPEND Source: GlobalData 4 NewRiver REIT plc Annual Report and Accounts 2017 NEWRIVER’S POSITION OUR PORTFOLIO IS FOCUSED ON CONVENIENTLY POSITIONED COMMUNITY ASSETS 16% pubs + c-stores 84% convenience-led retail Source: Company NewRiver REIT plc Annual Report and Accounts 2017 5 OUR MARKETPLACE THE 55+ DEMOGRAPHIC IS FORECAST TO ACCOUNT FOR ALMOST 60% OF IN-STORE SALES GROWTH OVER THE NEXT 10 YEARS Source: Global Data 6 NewRiver REIT plc Annual Report and Accounts 2017 NEWRIVER’S POSITION OUR PORTFOLIO IS WELL-PLACED TO CAPTURE INCREASED SPEND FROM CHANGING DEMOGRAPHICS Age group vs customer percentage The 45+ demographic accounts for 64% of NewRiver’s portfolio 65+ 55 – 64 45 – 54 35 – 44 25 – 34 18 – 24 30% 18% 16% 12% 14% 10% Source: NewRiver/CACI Consumer Surveys 2017 NewRiver REIT plc Annual Report and Accounts 2017 7 OUR MARKETPLACE At the heart of the UK retail and leisure market Our convenience‑led, community‑ focused retail and leisure portfolio is ideally positioned to cater for the non‑discretionary, essential needs of the UK consumer. Retail represents 84% of our portfolio and notwithstanding the uncertain economic landscape, the UK retail market is forecast to continue to grow, with convenience‑driven categories dominating total physical store spend. In 2016, convenience and value retail operators accounted for the greatest share of new store openings. Moreover, the physical store continues to be fundamental to the retail mix, with the top 10 multichannel retailers accounting for nearly 50% of total online sales. Our portfolio t o r e s s - d c Pubs a n The UK retail market is forecast to grow with convenience-driven categories leading the way for physical spend Retail sales growth forecast Total retail spend 21.4 18.0 14.8 5,292 41,771 270,811 14,969 73,666 317,963 8,660 56,478 297,288 Food & grocery Health & beauty 15.4 2,336 28,510 169,225 7.3 8.8 462 14,410 154,137 301 10,086 131,388 7.7 10.5 10.9 452 2,998 28,100 274 2,473 23,355 147 1,500 19,826 2016 2021 2026 2016 2021 2026 2016 2021 2026 £317.9bn £362.4bn £406.6bn £141.8bn £169.0bn £200.1bn £21.5bn £26.1bn £31.6bn Sales through physical stores (£m) Online sales, with home delivery (£m) Online sales, with click & collect fulfilment (£m) Online Penetration (%) Source: GlobalData • In 2016, total retail spend in the UK was £317.9bn, with physical sales and click & collect accounting for £276.1bn of total spend. • By 2021 total retail spend is forecast to increase to £362.4bn, with physical and click & collect sales accounting for £305.9bn, an increase of 11%. • By 2026 total retail spend is forecast to increase to £406.6bn, with physical and click & collect sales accounting for £332.9bn, a further increase of 9%. • Although online penetration is forecast to increase from 14.8% to 18.0% by 2021 (and to 21.4% in 2026), convenience‑driven/non‑discretionary spend is forecast to remain resilient to the growth of online and has the strongest growth prospects across retail over the coming years. l i a t e d R n v e nience-le Shopping centres Retail warehouses High street (Big Boxes) Retail development Pubs and convenience stores o C 61% 14% 4% 5% 16% 8 NewRiver REIT plc Annual Report and Accounts 2017 This high-volume convenience-led spend is well served by our portfolio NewRiver Income Profile Grocery & Convenience 12% 67% Value Fashion Discount & Value Health & Beauty Banks Food & Beverage Community pubs Convenience & Community 12% 11% 7% 1% 1% 19% 67% of NewRiver’s income is generated by convenience & community Forecast growth in retail spend is underpinned by changing demographics Convenience and value retailers continue to expand The 55+ age-group is set to account for 57.5% of all store and click & collect sales growth over the next ten years Spend growth by age 2016-2026 Top 30 retailers by store openings 2016 split by sector Value 38.6% Convenience 30.3% +£5bn +£6.1bn +£13bn +£3bn +£15.1bn +£22.1bn Home 10.3% 25 – 34 9.4% 45 – 54 5.4% 18 – 24 7.7% 35 – 44 20.1% 55 – 64 23.4% 65+ 34.1% Other 20.8% Source: GlobalData • Between 2016 and 2026, GlobalData forecasts that a further £64.7bn will be added to the retail market due to sales made either in store or through click & collect. Of this, 57.5% will come from shoppers aged 55 and over. • The under 35s are less financially mobile than their older generations, suffering lower disposable incomes, reduced car ownership and significant barriers to getting on to the property ladder. • The ageing of the comparatively asset‑rich, baby‑boomer generation, means that spending and, in particular, spending through stores and click & collect, is set to be driven by the baby‑boomers. Our portfolio is well-placed to capture spend from changing demographics • With 64% of shoppers across NewRiver’s portfolio in 2017 aged 45 and over, NewRiver is well placed to benefit from this key growth segment of the population over the next ten years. • Older shoppers appreciate the ease of access and free parking offered by retail parks, which now constitute 14% of the NewRiver portfolio. NewRiver Shopper Age Profile Source: GlobalData • Bucking the trend for margin depletion over the past decade or so, the store‑only value retailers, including B&M and Home Bargains, have historically performed well in challenging economic environments. These retailers have successfully expanded, maintaining healthy operating margins, and are looking to continue to expand. Our portfolio is well-placed to capture the growth in value retail NewRiver’s top 10 retailers is comprised of robust, expanding convenience and value led retailers. 18 − 24 10% 25 − 34 14% 35 − 44 12% 45 − 54 16% 55 − 64 18% 65+ 30% Source: NewRiver/CACI Consumer Surveys 2017 NewRiver REIT plc Annual Report and Accounts 2017 9 STRATEGIC REPORT OUR BUSINESS AT A GLANCE A convenience-led, community-focused portfolio We invest in convenience & community to deliver secure and sustainable returns to our shareholders. Since the Company was founded in September 2009 we have hand‑picked a high quality and geographically diverse portfolio, catering to the day to day needs of our consumers, occupiers & communities. 04 01 02 03 04 19 12 11 05 07 05 09 06 10 09 08 20 17 03 15 01 12 10 06 07 11 14 15 11 09 16 13 24 16 18 17 23 03 08 07 25 10 05 26 22 27 15 14 21 23 24 01 30 02 29 31 32 19 08 04 28 33 06 14 18 02 13 12 20 21 22 13 24 Our retail portfolio Invested in over 60 towns across the UK 33 Shopping centres 1. Leith, Edinburgh 12. Hull 2. Paisley 13. Wakefield 3. Newton Mearns 14. Huddersfield 4. Kilmarnock 15. Widnes 5. North Shields 16. Skegness 6. Wallsend 17. Market Deeping 7. Newtownabbey, Belfast 18. Wisbech 8. Middlesbrough 19. Erdington 9. Darlington 20. Carmarthen 10. Bridlington 21. Llanelli 11. Morecambe 22. Cardiff 23. Oxford 24. Cowley, Oxford 25. Witham 26. Bexleyheath, London 27. Penge, London 28. Warminster 29. Burgess Hill 30. Fareham 31. Hastings 32. Worthing 33. Boscombe 22 Retail warehouses (* 2 Development sites) 1. Hull 2. Wrexham 3. Wymondham 4. Gloucester 5. Cookstown 6. Wirral 7. Blackburn 8. Felixstowe 17. Beverley 18. Saltney, Chester 19. Dumfries 20. York 21. Daventry 22. Canvey Island, Essex* 23. Stamford* 24. Sheffield 9. Chester 10. Gateshead 11. Bradford 12. Kendal 13. Barry 14. Liverpool 15. Coalville 16. Leeds 15 High street locations 1. Basingstoke 6. Grimsby 2. Burgess Hill 7. Harlow 3. Doncaster 8. Hereford 4. Grangemouth 9. Newcastle 5. East Ham 10. Romford 11. Warrington 12. Wrexham 13. Wrexham 14. Market Harborough 15. Hull Our pub portfolio 344 pubs throughout the UK Trent Portfolio (189 Pubs) Mantle Portfolio (155 Pubs) Visit our website for an interactive view of our locations at www.nrr.co.uk 10 NewRiver REIT plc Annual Report and Accounts 2017 Assets under management £1.3 billion t o r e s (FY16: £1.1 billion) s - d c Pubs a n Income profile 67% Convenience and Community l i a et d R n v e nience-le o C Shopping centres Retail warehouses High street (Big Boxes) Retail development Pubs and convenience stores 61% 14% 4% 5% 16% y t i n u m m o nie nce and C e v n C o Grocery & Convenience 16% Home, Electrical and DIY 13% Value Fashion 12% Mid-market Fashion Discount & Value Health & Beauty Banks Food & Beverage 11% 7% 1% 1% Books & Stationery Service Related Jewellery Games & Toys Community pubs 19% Leisure Convenience and Community 67% Other 5% 5% 4% 2% 1% 1% 2% Top 10 occupiers 1 2 3 4 5 % Rent secured No. of stores 2.6% 2.4% 2.4% 2.4% 23 22 8 6 6 7 8 9 2.0% 15 10 % Rent secured No. of stores 2.0% 16 1.8% 1.7% 1.7% 1.7% 9 7 3 9 Retail occupancy rate 97% (FY16: 96%) Retail average rent £12.45 (FY16: £12.14) Shopping centre footfall 149m (FY16: 140m) Retail occupiers 2,000 (FY16: 1,840) Total leasing events 355 (FY16: 235) NewRiver REIT plc Annual Report and Accounts 2017 11 STRATEGIC REPORT CHAIRMAN’S REVIEW Continued growth in uncertain times Paul Roy Chairman I am delighted to report that NewRiver REIT plc (“NewRiver”) produced excellent financial results for the year ended 31 March 2017. Funds From Operations grew by 24% to £58 million, and the Company increased the ordinary dividend for the period by 8% to 20.0 pence per share (FY16 18.5 pence), as well as declaring an additional special dividend of 3.0 pence per share. Following graduation from AIM to a Premium Listing on the Main Market of the London Stock Exchange in August 2016, the Company became a constituent of the FTSE 250 and FTSE All‑Share indices on 19 December 2016. From the same date, it was also included in the EPRA indices which measure the performance of the European listed REIT sector. I would like to welcome all new shareholders joining the register as a result of these significant events. On admission to the Main Market, NewRiver REIT plc became the ultimate parent company, replacing NewRiver Retail Limited. The change in name reflected the combination of the Company’s portfolio now including both retail and leisure assets as well as its high dividend pay‑out ratio as a UK‑registered Real Estate Investment Trust. The core business strategy remains unchanged and the Company continues to operate according to its strict founding principles of active asset management and risk‑controlled development. NewRiver’s specialism is owning convenience‑led, community‑focused assets, primarily serving family shopping and leisure requirements. Its occupiers are, in the main, value‑led retailers, paying affordable rents and providing shoppers with everyday non‑discretionary items such as clothing and groceries. From the perspective of the landlord, this sector consistently proves itself to be a highly resilient segment of the retail market, capable of sustaining cash flows in most economic conditions. The strength of the Company’s key operating metrics demonstrated the soundness of its business model during what was at times a turbulent year for the retail sector generally. Notably, like‑for‑like footfall and occupancy levels both improved compared to the previous period. 12 NewRiver REIT plc Annual Report and Accounts 2017 A track record of delivery Funds From Operations £58.2m (FY16: £47.1m) FFO per share 24.9p (FY16: 26.6p) Total dividend per share 23.0p (FY16: 18.5p) Assets under management £1.3bn (FY16: £1.1bn) The Company showed agility in the acquisitions market over the year with the purchase of a major shopping centre in Bexleyheath, South East London, a retail park in Dumfries and a retail warehouse in Sheffield. The latter purchase subsequently generated cash receipts of £11.5 million, which, in accounting terms, fall within the definition of Funds From Operations. The Board has therefore approved a further special dividend of 3.0 pence to be paid on 4 August 2017 to shareholders on the register on 16 June 2017. The ex‑dividend date will be 15 June 2017. I am also delighted to announce that the first quarter dividend for FY18 will be increased to 5.25 pence per share (Q1 FY17: 5.00 pence), payable on 4 August 2017 to shareholders on the register on 16 June 2017. The ex‑dividend date will be 15 June 2017. As previously announced, Chris Taylor, Senior Independent Director, stepped down from the Board with effect from 9 April 2017. On behalf of NewRiver, I would like to thank Chris for his major contribution over five years as a Non‑Executive Director and to wish him well for the future. On behalf of the Board, I would also like to thank NewRiver’s management and employees, whose hard work, enthusiasm and entrepreneurial flair delivered another strong performance. Finally, I am grateful to the Company’s advisers and shareholders for their continuing support. While the Board is aware of general economic caution in light of uncertainty over Brexit negotiations and the potential for rises in inflation and interest rates, it believes that NewRiver is well placed to meet the challenges that could arise in this environment. The Company owns a sizeable portfolio with critical mass. It is highly cash generative with an occupier base representing some of the strongest covenants in the UK retail and leisure sectors. Assets are geographically diversified with a focus on day to day shopping needs which the Company considers to be significantly less volatile than other segments of the retail market. The Board remains optimistic in its outlook for the Company and looks forward to the future with confidence. Paul Roy Chairman 15 May 2017 NewRiver REIT plc Annual Report and Accounts 2017 13 STRATEGIC REPORT CHIEF EXECUTIVE’S STRATEGIC REVIEW Focused strategy delivering growing cash profits “ Our convenience‑led, community‑focused retail & leisure portfolio has proved well‑positioned in what has been an uncertain twelve months at the macro economic and political levels.” This has been another outstanding year for NewRiver, which is reflected in a strong set of full year results. These results also demonstrate that our focused business model, which we have strictly adhered to since our IPO, is clearly working well. Our convenience‑led, community‑focused retail and leisure portfolio has proved well‑positioned and well‑placed in what has been an uncertain twelve months at the macro economic and political levels. As a business, we have maintained our disciplined approach to stock selection, remained active asset managers, progressed our risk‑controlled development pipeline and recycled capital profitably, all of which has allowed us to continue to deliver growing and sustainable cash profits to our shareholders. Our Funds From Operations (‘FFO’) of £58.2 million were up 24% compared to the same period last year due to acquisitions made in the last 12 months as well as our highly active asset management programme. The Board recently approved a final quarterly dividend of 5.0 pence per share, resulting in a fully covered ordinary dividend for the year of 20.0 pence per share, up over 8% compared to last year. We are delighted to announce an additional 3.0 pence per share special dividend linked to our acquisition in Sheffield, taking the total dividend for the year to 23.0 pence per share, an increase of 24%. This special dividend demonstrates our commitment to continue to distribute growing cash returns to our shareholders. Looking ahead, the increase in our Q1 FY18 dividend to 5.25 pence per share, an increase of 5% on Q1 FY17, reflects our confidence in the security and sustainability of our cash flows. Our assets under management now stand at £1.3 billion, £1.1 billion at NewRiver’s share, with our EPRA net asset value per share down marginally by 3 pence to 292 pence reflecting the absorption of acquisition costs and Main Market move costs as well as a small 0.6% reduction in portfolio valuation. Importantly, this reduction came in the first half of our financial year, when real estate values were 14 NewRiver REIT plc Annual Report and Accounts 2017 David Lockhart Chief Executive Officer Our Executive Committee Mark Davies Chief Financial Officer Allan Lockhart Property Director Nick Sewell Executive Committee member impacted by Brexit fears, and our valuations showed improvement in the second half. Our IFRS net assets have decreased by 0.8%, due principally to the same factors. During the year, we completed acquisitions totalling £158 million at an equivalent yield of 7.2%. In April 2016 we completed our largest acquisition to date, buying the Broadway Shopping Centre and Broadway Square Retail Park in Bexleyheath, South East London, for £120 million at a blended equivalent yield of 7.0%. We have been active in the year since acquisition, improving rental tone in the shopping centre by 15% and working in partnership with the London Borough of Bexley to design a masterplan for the shopping centre, retail park and surrounding council owned land. In April 2017, following a comprehensive fit out, London based Morleys Department Stores opened at the centre in the 40,000 sq ft unit formerly occupied by BHS. The opening of this new store has been a real success for Morleys, and we have benefitted from increased footfall across the rest of the shopping centre. We completed the acquisition of Cuckoo Bridge Retail Park in Dumfries in June 2016 in an off‑market transaction for £20 million. At the time of acquisition, we identified several opportunities to drive income Significant milestones in 2017 April 2016 June 2016 Aug 2016 Sept 2016 Acquired the Broadway Shopping Centre and the Broadway Square Retail Park, Bexleyheath £120m Acquired Cuckoo Bridge Retail Park, Dumfries £20m Completed move to Main Market from AIM Acquired Retail Warehouse in Sheffield from open ended fund £18m Successfully qualified for the FTSE 250 and EPRA indices Completed sale of first C‑store 4.85% yield Received £10.8m* surrender premium on Retail Warehouse in Sheffield Dec 2016 Mar 2017 Mar 2017 * Rents received in interim of £0.7m, total receipt £11.5m and capital growth by improving the occupier line‑up and have agreed heads of terms with a fashion/ homeware occupier to introduce a 20,000 sq ft full line store subject to obtaining planning consent which is anticipated in the next few months. In September 2016, we moved quickly to acquire a retail warehouse in Sheffield from an open‑ended property fund for £18 million. As we completed the acquisition, we exchanged contracts with the occupier to accept a surrender premium of up to £12.25 million by May 2017, meaning that in essence we acquired a 110,000 sq ft prominently located retail warehouse on an 11 acre site for a net price of £6 million. In March 2017, having moved into advanced negotiations with a number of potential occupiers and purchasers, we requested and received the surrender premium, having received rent in the interim, the majority of which we are paying to our shareholders as a 3.0 pence per share special dividend. Pleasingly, the asset has been independently valued at 50% more than our net purchase price. Across our retail portfolio we continued our track record of strong and improving operational metrics, with the increase in occupancy from 96% in March 2016 to 97% in March 2017 reflecting the compelling nature of our convenience‑led, community‑focused portfolio to occupiers. Our highly active approach to asset management resulted in the completion of more than 300 new lettings and renewals, with long term deals completed on terms 3.9% ahead of ERV. Importantly our rents remain affordable for our occupiers, at £12.45 per sq ft on average. The combination of our high occupancy and affordable average rents indicates to us that retailers are trading profitably at our assets, underpinning the sustainability of our income. This affordability will be further supported by this year’s business rates revaluation, with draft rateable values across our retail portfolio in England, Scotland and Wales falling by over 19% on average. Our pub operators will also benefit from the rates revaluation, saving on average 40% on business rates from 1 April 2017. During the year, we successfully applied our active asset management approach to our pub portfolio. At the time of the Trent portfolio acquisition, we signed a four year leaseback agreement with Marston’s Plc which ends later this year. NewRiver REIT plc Annual Report and Accounts 2017 15 STRATEGIC REPORT CHIEF EXECUTIVE’S STRATEGIC REVIEW CONTINUED Of the 189 pubs held in the Trent portfolio, we have now successfully transferred the management of 44 pubs from Marston’s, and during the year we secured contracted income on a further 22 pubs by surrendering the leaseback arrangement early and agreeing new 15 year RPI linked leases with Marston’s. The remaining pubs will be transferred in small batches over the remainder of the calendar year. We have continued to make selective and profitable disposals from our pub portfolio, selling seven pubs for £4 million in the year representing a 10% premium to March 2016 valuation and over a 30% premium to purchase price. We have made good progress on our 1.9 million sq ft risk‑controlled development pipeline during the year. At our 465,000 sq ft consented regeneration project in Burgess Hill, we have pre‑let 49% of the retail and leisure element, up from 41% just six months ago, with leases now signed with Next and Nandos. On the residential element of the scheme, we have agreed terms with a residential investment company for a significant pre‑sale. In order to facilitate the development, we recently agreed terms with Lidl and Iceland to surrender and relocate to sites adjacent to the shopping centre, as well as agreeing to re‑locate the local council owned library. All of this progress means that we hope to be in a position to start on site later in the summer. Elsewhere in our risk‑controlled development pipeline, in November 2016 we received planning consent at Canvey Island for a 62,000 sq ft retail park which is already 52% pre‑let. In the same month we also submitted the planning application for our exciting 236,000 sq ft mixed‑use regeneration in Cowley, Oxford. Our current development commitment is modest, with 26,000 sq ft under construction all of which is pre‑let. Our risk‑controlled approach to development means we will not commit to further developments without substantial pre‑letting. “ We believe that with our convenience and community specialism, strong operational metrics, affordable rents and conservative balance sheet we are well‑positioned to continue to deliver secure and sustainable cash returns to our shareholders and we look forward to the coming year with confidence.” The convenience store programme within our pub portfolio continued to progress, and we handed over a further eight c‑stores to the Co‑operative in the period taking the total number completed to date to 11. In early 2017 we completed our first c‑store disposal for £970,000, representing an initial yield of 4.85%, and over 11% ahead of valuation. We are on site for the construction of a further three c‑stores totalling 11,000 sq ft and we have consent to construct a further 15 totalling 53,400 sq ft. Our LTV was 37% at 31 March 2017, up from 27% at March 2016 predominantly due to the acquisition of our assets in Bexleyheath which completed in April 2016. Our interest cover remained robust at 4.5x and our weighted average cost of debt was 3.5%, down from 3.7% in March 2016. We completed our move from AIM to a Premium Listing on the Main Market in August 2016 marking a significant milestone for NewRiver and we continued this impressive momentum into December, when we qualified for admission into the FTSE 250, FTSE All‑Share and EPRA indices at the first attempt. We have a fantastic, talented and enthusiastic team at NewRiver and I would like to thank them all for their hard work and significant contribution to this year’s results. 16 NewRiver REIT plc Annual Report and Accounts 2017 Outlook We believe that with our convenience and community focus, strong operational metrics, affordable rents and conservative balance sheet we are well‑positioned to continue to grow and deliver secure and sustainable cash returns to our shareholders. In the context of the slowdown in the investment market since the EU Referendum we are pleased to have bided our time and believe that current market conditions and the pricing for typical assets which NewRiver wishes to acquire are beginning to provide opportunities for the Company. We have never relied on the market to drive returns for our shareholders, instead we have ourselves created value by applying our proven business model, and focusing on the convenience‑led, community‑focused retail and leisure sectors where the UK household budget is spent day in, day out. We remind ourselves that the business was founded in 2009 during a severe recession and has grown into a FTSE 250 entity in less than eight years. NewRiver is highly capable of enhancing shareholder value through its very active asset management programme and our strict adherence to risk‑controlled development practices. Our business model remains highly scalable and we view the future with excitement and confidence. David Lockhart Chief Executive 15 May 2017 NewRiver REIT plc Annual Report and Accounts 2017 17 STRATEGIC REPORT OUR BUSINESS MODEL Delivering returns at every stage What sets us apart Our people • Experienced management team • In‑house capability in investment, asset management, development and financial management • Lean, motivated and entrepreneurial head office team Our portfolio • High yield and low risk characteristics, hand‑picked over the last eight years • Track record of high occupancy and affordable average rents • Ability to enhance income through active asset management • Opportunities to create income and capital growth through inbuilt risk‑controlled development pipeline Our key relationships • Retailers and leisure operators: makes us aware of expansion plans and space requirements • Councils and communities: enables execution of asset management and development plans • External consultants: Facilitates off‑market deal execution • Lenders: provides flexible & low cost financing Our approach to risk • Operational risk management: largest retailer accounts for less than 3% total of rent • Risk‑controlled approach to development means we will not commit to developments without significant pre‑lets or pre‑sales • Comprehensive financial policies in place • Uncomplicated debt structure, 97% hedged, conservative LTV with high interest cover 18 NewRiver REIT plc Annual Report and Accounts 2017 How we make money Disciplined stock selection e n e fi ts of scale B CASH RETURNS C o n servative ba l a n c e s h eet Profitable capital recycling Active asset management and risk controlled development Disciplined stock selection We target high yielding assets with low risk characteristics. We have a disciplined approach, and our significant experience in our market means we are able to price risk appropriately and so buy assets at the right price. Active asset management & risk-controlled development Our core strategy is to enhance and protect income returns through our active asset management initiatives. A deep understanding of our market and strong relationships with our high quality retailers means we are able to deliver the right space in the right locations at affordable rental levels. Our risk‑controlled development program seeks to create income and capital growth from within our portfolio. We are able to create value using our in‑house expertise to obtain planning consents, which we can then choose to either develop ourselves or realise through capital recycling. Our risk‑controlled approach means that we will not commit to developments without securing significant pre‑lets or pre‑sales. We regularly assess potential upside opportunities in trading out of assets and recycle capital into new opportunities where appropriate. We have a track record of doing this profitability. The value we create For our investors • Growing & sustainable cash returns Total dividend 23.0p (+24%) For our customers • Low occupancy costs through affordable rents and business rate reductions Average rent per sq ft Business rate reductions of • Continued growth in assets under management, gross rental income, FFO and dividend Assets under management £1.3 billion £12.45 19% across retail portfolio For our communities • Thriving town centres and communities Retail occupancy 97% NewRiver REIT plc Annual Report and Accounts 2017 19 STRATEGIC REPORT OUR STRATEGY Our aim is to create secure, sustainable and growing cash returns At the core of our strategy and ethos is delivering superior returns to our shareholders. In order to achieve this, we have always recognised the importance of cash returns as demonstrated by our growing Funds From Operations and progressive dividend policy Strategic priority Strategic objective 1 Disciplined stock selection 2 Active asset management 3 Risk-controlled development 4 Profitable capital recycling 5 Maximise benefits of scale/ Conservative balance sheet To grow the business through selective acquisitions where we can add value and grow income streams To implement active asset management initiatives across our portfolio to enhance and protect our income streams Progress in FY17 • £158 million of strategic acquisitions • Retail occupancy increased to 97% Priorities in FY18 at an average equivalent yield of 7.2% • Largest single acquisition to date of £120 million of Broadway Shopping Centre and Broadway Square Retail Park in Bexleyheath • Acquisition of retail warehouse in Sheffield for £18 million from open‑ended property fund from 96% in March 2016 • 355 leasing events completed, increased from 235 in FY16 • Long term leasing events completed 3.9% ahead of ERV • Like‑for‑like net rental income increased by 1.2% through active asset management • Remain active in the investment market and continue to target high yielding assets with low risk characteristics • Complete ongoing active asset management initiatives at the Abbey Centre, Newtownabbey and Coalville Retail Park • Progress asset management • Achieve business rates savings and risk‑controlled development initiatives at Bexleyheath • Progress repositioning of retail warehouse in Sheffield identified in FY17 • Sustain high level of retail occupancy • Maintain affordable rents for occupiers to ensure sustainability of cash income KPIs • Total property return • FFO • Annualised rent roll • Total accounting return • Total property return • Annualised rent roll • Leasing events • Retail occupancy • Total accounting return • FFO • Total accounting return • FFO • LTV • Interest cover • Admin cost ratio 20 NewRiver REIT plc Annual Report and Accounts 2017 To create income and capital value To generate cash profits for our To focus on driving efficiencies in from within our existing portfolio (e.g. airspace above our assets) through new developments and redevelopments shareholders and prove our valuations our financing and operating costs to through recycling mature assets and maximise cash returns to shareholders, opportunistic disposals while maintaining a conservative balance sheet • 77,100 sq ft of development • Sold £10.7 million of assets on terms • Cost of debt reduced to 3.5% projects completed, including eight 7% ahead of valuation and almost from 3.7% in March 2016 convenience stores for the Co‑op 30% ahead of total cost • Interest cover improved to 4.5x • Planning secured on 62,000 Canvey • Includes £4.1 million of pub disposals from 4.3x in FY16 Island development, and over 50% at 10% ahead of valuation pre‑let in the year • Includes first convenience store • Rothschild & Co appointed as independent debt advisor in • Planning submitted on 236,000 sq ft disposal for £1.0 million, at an initial February 2017 to assist Management mixed‑use development in yield of 4.85% • Continue to recycle assets that no • Complete refinancing exercise, longer meet our return criteria • Continue to make opportunistic disposals to special purchasers in completing a balance sheet refinancing exercise • Admin cost ratio reduced to 15.1% from 18.5% including moving from secured to unsecured debt with an improved maturity and potentially a cost benefit • Maintain admin cost ratio below 16% over medium term Cowley, Oxford • Pre‑lets secured on Burgess Hill, meaning now 49% pre‑let • Deliver our 15th c‑store to the Co‑operative to trigger £750k incentive payment • Commence on‑site at our 62,000 sq ft Canvey Island retail park development • Commence on‑site at our 465,000 sq ft mixed use development in Burgess Hill • Secure planning consent at our 236,000 sq ft mixed‑use regeneration in Cowley, Oxford • Total property return • Annualised rent roll • Leasing events • Total accounting return Strategic priority Strategic objective Progress in FY17 To grow the business through selective To implement active asset acquisitions where we can add value management initiatives across our and grow income streams portfolio to enhance and protect our income streams • £158 million of strategic acquisitions • Retail occupancy increased to 97% at an average equivalent yield from 96% in March 2016 of 7.2% • 355 leasing events completed, • Largest single acquisition to date of increased from 235 in FY16 £120 million of Broadway Shopping Centre and Broadway Square Retail Park in Bexleyheath • Acquisition of retail warehouse in Sheffield for £18 million from open‑ended property fund • Long term leasing events completed 3.9% ahead of ERV • Like‑for‑like net rental income increased by 1.2% through active asset management market and continue to target high yielding assets with low risk characteristics management initiatives at the Abbey Centre, Newtownabbey and Coalville Retail Park • Progress asset management • Achieve business rates savings and risk‑controlled development identified in FY17 initiatives at Bexleyheath • Progress repositioning of retail warehouse in Sheffield • Sustain high level of retail occupancy • Maintain affordable rents for occupiers to ensure sustainability of cash income Priorities in FY18 • Remain active in the investment • Complete ongoing active asset KPIs • Total property return • FFO • Annualised rent roll • Total accounting return • Total property return • Annualised rent roll • Leasing events • Retail occupancy • Total accounting return 1 Disciplined stock selection 2 Active asset management 3 Risk-controlled development 4 Profitable capital recycling To create income and capital value from within our existing portfolio (e.g. airspace above our assets) through new developments and redevelopments • 77,100 sq ft of development projects completed, including eight convenience stores for the Co‑op • Planning secured on 62,000 Canvey Island development, and over 50% pre‑let in the year • Planning submitted on 236,000 sq ft mixed‑use development in Cowley, Oxford • Pre‑lets secured on Burgess Hill, meaning now 49% pre‑let • Deliver our 15th c‑store to the Co‑operative to trigger £750k incentive payment • Commence on‑site at our 62,000 sq ft Canvey Island retail park development • Commence on‑site at our 465,000 sq ft mixed use development in Burgess Hill • Secure planning consent at our 236,000 sq ft mixed‑use regeneration in Cowley, Oxford • Total property return • Annualised rent roll • Leasing events • Total accounting return To generate cash profits for our shareholders and prove our valuations through recycling mature assets and opportunistic disposals • • Sold £10.7 million of assets on terms 7% ahead of valuation and almost 30% ahead of total cost Includes £4.1 million of pub disposals at 10% ahead of valuation Includes first convenience store disposal for £1.0 million, at an initial yield of 4.85% • • Continue to recycle assets that no longer meet our return criteria • Continue to make opportunistic disposals to special purchasers 5 Maximise benefits of scale/ Conservative balance sheet To focus on driving efficiencies in our financing and operating costs to maximise cash returns to shareholders, while maintaining a conservative balance sheet • Cost of debt reduced to 3.5% • from 3.7% in March 2016 Interest cover improved to 4.5x from 4.3x in FY16 • Rothschild & Co appointed as independent debt advisor in February 2017 to assist Management in completing a balance sheet refinancing exercise • Admin cost ratio reduced to 15.1% from 18.5% • Complete refinancing exercise, including moving from secured to unsecured debt with an improved maturity and potentially a cost benefit • Maintain admin cost ratio below 16% over medium term • FFO • Total accounting return • FFO • LTV • Interest cover • Admin cost ratio NewRiver REIT plc Annual Report and Accounts 2017 21 STRATEGIC REPORT OUR KPIS Measuring our strategic progress We measure our progress against our strategic objectives with reference to our key performance indicators (KPIs). These KPIs are linked to our strategic priorities and in some instances are used to determine how management and employees are remunerated. Indicator What it is Total property return* FY13: N/A FY14: N/A FY15: N/A FY16: N/A FY17 6.8% Annualised rent roll FY13 19.2 FY14 FY15 FY16 FY17 31.2 56.2 £96.5m Retail occupancy FY13 FY14 FY15 FY16 FY17 97% Leasing events 142 141 216 235 FY13 FY14 FY15 FY16 FY17 355 6.8% 85.1 96.5 94% 95% 96% 96% 97% 355 Total property return is a measure of the income and capital growth generated across our portfolio. It is calculated by MSCI Real Estate (formerly known as IPD) on our behalf, using information provided by our independent valuers, and we assess our performance against the market by comparing our returns to the MSCI‑IPD All Retail benchmark. Annualised rent roll is a measure of the scale of our business and the success of our active asset management and risk‑controlled development. It is disclosed on a proportionally consolidated basis, including rental income from joint ventures at our share. Retail Occupancy is the estimated rental value of units expressed as a percentage of the total estimated rental value of the retail portfolio, excluding development activities. The number of leasing events completed is a measure of how active we have been in our asset management over the year. Leasing events include new leases, lease renewals and lease regears. * This is the first year we have been included in the MSCI Real Estate databank, hence we cannot show our performance historically. 22 NewRiver REIT plc Annual Report and Accounts 2017 Further details on remuneration policies and the metrics used to determine remuneration are set out in the remuneration report on pages 78 to 101. Our performance How it links to our strategic priorities We delivered a total property return of 6.8%, outperforming the MSCI‑IPD All Retail benchmark by 400 bps. We delivered an income return of 7.4%, outperforming the benchmark by 230 bps, and a capital return of ‑0.6%, outperforming the benchmark by 170 bps. 1 2 & 3 We completed £158.4 million of acquisitions during the year, increasing our annualised rent roll by £12.6 million**. Like‑for‑like net income increased by 1.2% due principally to our active asset management and risk‑controlled development. 1 2 & 3 Retail occupancy increased from 96% to 97% in the period, due to our active asset management activity. This is the highest level of occupancy we have seen since the Company was founded almost 8 years ago. 2 & 3 We completed 355 leasing events in the year, across both our retail and pub portfolios, which compares to the 235 leasing deals completed in FY16. These leasing deals were completed across 1.1 million sq ft of space, compared to 0.5 million sq ft in FY16. Long term deals were completed 3.9% ahead of our valuers’ estimate of rental values. 2 & 3 NewRiver REIT plc Annual Report and Accounts 2017 23 STRATEGIC REPORT OUR KPIS CONTINUED Indicator What it is Funds From Operations 9.5 20.9 FY13 5.2 FY14 FY15 FY16 FY17 £58.2m Total Accounting Return FY13 -1.2% FY14 FY15 FY16 FY17 5.7% 5.7% Loan to Value FY13 FY14 FY15 FY16 FY17 37% Interest cover FY13 FY14 FY15 FY16 FY17 4.5x Admin cost ratio FY13 FY14 FY15 FY16 FY17 15% Funds From Operations (‘FFO’) is a Company measure determined by cash profits which includes realised recurring cash profits plus realised cash profits or losses on the sale of properties and excludes other one off or non‑cash adjustments. FFO per share is used by the Company when considering our dividend policy. 47.1 58.2 10.8% 15.7% 18.1% Total Accounting Return (‘TAR’) measures the change in EPRA Net Asset Value per share over the year, plus dividends paid, as a percentage of the EPRA Net Asset Value at the start of the financial year. TAR performance relative to UK listed Real Estate Investment Trusts is a key metric used in setting the long‑term incentive plan (‘Performance Share Plan’) remuneration for Executive Directors and senior members of staff. 25% 27% 39% 37% 51% Loan to Value (‘LTV’) is the proportion of our properties that are funded by borrowings. The measure is presented on a proportionally consolidated basis, including our share of properties and borrowings held in joint ventures. Maintaining an LTV of less than 50% is one of our four key Financial Policies, and compliance with these policies contributes towards Executive Director variable pay. 3.3x 3.9x 3.9x 4.3x 4.5x Interest cover is the ratio of our operating profit to our net financing costs, on a proportionally consolidated basis, including our share of operating profit and net financing costs from joint ventures. Maintaining interest cover of more than 2.0x is one of our four key Financial Policies, and compliance with these policies forms part of Executive Director variable pay. 24% 22% 23% The Admin cost ratio the ratio of administrative expenses to gross revenue on a proportionally consolidated basis, including our share of administrative expenses and gross revenue from joint ventures. It is a measure of the operational efficiency of the Company. 19% 15% 24 NewRiver REIT plc Annual Report and Accounts 2017 Our performance How it links to our strategic priorities FFO increased by 24% to £58.2 million in FY17, from £47.1 million in FY16. This increase was principally due to acquisition activity, including the surrender premium received on our retail warehouse acquisition in Sheffield. 1 4 5 Total Accounting Return was 5.7% on a paid basis. This return is principally due to 19.75 pence per share of dividend paid in the year, offset by a marginal decline in EPRA Net Asset Value per share of 3 pence. £ Incentive Our LTV was 37% at 31 March 2017, increased from 27% at 31 March 2016 due principally to acquisitions made in the year. While LTV has increased in the year, we have no intention of increasing our LTV in the near term and we are significantly below our upper limit of 50% as stated in our Financial Policies. Our interest cover was 4.5x in FY17, increased from 4.3x in FY16, due to acquisition activity and a reduction in our cost of debt from 3.7% to 3.5%. Our Admin cost ratio was 15% in FY17, reduced from 19% in FY16 as we have continued to benefit from our increasing scale. £ Incentive £ Incentive 5 5 5 NewRiver REIT plc Annual Report and Accounts 2017 25 STRATEGIC REPORT PROPERTY REVIEW Active approach creating secure and sustainable income changes will be as influential if not more so than technology over the coming years and we are well positioned to benefit from the growth of the grey pound and undoubted benefits of click and collect. Engagement: We have close and well established relationships with our retail and leisure occupiers. We understand their challenges, not least from rising input and staff costs, and we are focused on working with and on behalf of our occupiers to ensure that they will continue to operate profitably at our assets and grow their bottom line. Experienced and focused: We benefit from an exceptionally talented team that is patient, determined and focused. We have scale within the business to drive efficiency and create value. Our occupiers listen to us and we listen to them. With uncertainty comes opportunity and we have a proven track record of sustainable cash flow enhancement and value creation and we remain well‑positioned for the future. The team to take us forward Emma Mackenzie Director Stuart Mitchell Director Charles Spooner Director Paul Wright Director David Shipton Director of Pubs and Leisure Justin Thomas Director of Residential Development Jamie Whitfield Director of Commercial Development Ben Green Director of Construction Katie Johnson- Heskins Head of Financial Planning and Analysis Lucy Mitchell Director of Marketing Allan Lockhart Property Director Overview Conveniently positioned at the heart of the community We are experts in the convenience‑led, community‑focused UK retail and leisure market and own, operate and actively manage a high quality, necessity based portfolio of assets that cater to the day to day needs of our consumers, retailers and communities. We are relevant, progressive and create attractive venues that cater to all daily needs. To successfully drive value and returns for our shareholders we are focused on consistent and sustainable cash flows, the realisation of embedded asset management opportunities and the unlocking of redevelopment and development value. We successfully apply a disciplined and focused plan to achieve the desired value and returns. Strategic: Our stock selection is supported by a wealth of experience and discipline which means that we are able to assess and price risk appropriately. Active: We are able to grow income and unlock value from within our portfolio through active asset management and risk‑controlled developments. Either opportunistically or once we have successfully implemented our business plans, we are able to realise and distribute the value we have created to our shareholders, through profitable capital recycling. Intelligence through research and local market knowledge: Across our retail portfolio, we conduct regular consumer surveys, so we understand how local residents are using our assets, what they value and what we can do to make their lives easier. These show a trend of high frequency visits and loyalty by our core customers. In our view, demographic 26 NewRiver REIT plc Annual Report and Accounts 2017 Highlights • Assets under management increased by 14% to £1.3 billion (NRR share £1.1 billion) • Portfolio capital return down 0.6% including acquisition costs; H2 +0.5% mitigating 1.0% fall seen in H1 • Ungeared total property return +6.8%, outperforming the MSCI‑IPD All Retail benchmark by 400 bps • £158.4 million of acquisitions at an average equivalent yield of 7.2% • Occupancy increased to 97% from 96% in March 2016; maintained above 94% since NRR was founded in 2009 • 355 total leasing events across 1,108,700 sq ft; new long term retail leasing events on average 3.9% ahead of ERV • Like‑for‑like net income +1.2%; affordable average retail rent of £12.45 per sq ft (March 2016: £12.14 per sq ft) • Like‑for‑like footfall +0.5%, outperforming benchmark by 210bps • Eight further convenience stores handed over to Co‑operative taking total delivered to date to 11 • Planning granted on 192,900 sq ft, including 62,000 sq ft Canvey Island Retail Park, already over 50% pre‑let • 384,800 sq ft of planning applications submitted, including 236,000 sq ft mixed‑use regeneration in Cowley, Oxford Portfolio performance As at 31 March 2017 Shopping centres Retail warehouses High street Pubs & c‑stores Development Valuation NRR share £m 697 153 45 178 57 Weighting NRR share % 61 14 4 16 5 H2 Capital Return % +0.6 +0.6 (2.7) +0.6 +1.5 FY Capital Return % NEY NIY % % 7.7 (0.8) 6.9 7.3 6.4 +0.5 6.9 (3.9) 7.1 (0.9) 10.8 10.8 (0.5) N/A N/A LFL ERV Growth % 1.6 2.1 2.5 N/A N/A Total 1,130 100 +0.5 (0.6) 7.5 8.1 1.7 During the year, our portfolio valuation at NRR share increased to £1.13 billion, from £0.97 billion in March 2016. Acquisitions accounted for the majority of the increase, offset by a marginally negative capital return of ‑0.6%, which includes acquisition costs and capital expenditure incurred. Capital returns fell in the first half by 1.0%, as the investment market stalled in the immediate aftermath of the EU Referendum, but importantly capital returns for the second half of the financial year were +0.5%. Our capital return compares favourably to the market, outperforming the MSCI‑IPD All Retail benchmark of ‑2.3% by 170 bps. Moreover, we delivered a total property return of 6.8%, significantly outperforming the benchmark of 2.8% by 400 bps. The portfolio equivalent yield stands at 8.1% in March 2017, from 8.2% in March 2016. The equivalent yield on our Shopping Centres, which account for 61% of our portfolio, has compressed from 7.9% to 7.7%, principally following the acquisition of our assets in Bexleyheath. Assets Under Management* £1.3 billion * NewRiver share: £1.1 billion Portfolio equivalent yield I S T R A T E G C R E P O R T 8.1% Retail occupancy 97% Shopping Centres 33 Retail Warehouses 22 High Street Assets 15 Pubs 344 t o r e s s - d c Pubs a n Shopping centres Retail warehouses High street (Big Boxes) Retail development Pubs and convenience stores o C 61% 14% 4% 5% 16% l i a t e d R n v e nience-le NewRiver REIT plc Annual Report and Accounts 2017 27 STRATEGIC REPORT PROPERTY REVIEW CONTINUED Disciplined stock selection Since 1 April 2016 we have completed £158.4 million of acquisitions in three separate transactions, at an average equivalent yield of 7.2%. From 1 April 2016 Broadway Shopping Centre & Retail Park, Bexleyheath Cuckoo Bridge Retail Park, Dumfries Retail warehouse, Sheffield Total acquisitions Price (gross) £m 120.3 20.2 17.9 158.4 Price (NRR share) % 120.3 20.2 17.9 158.4 Equivalent Yield % 7.0 7.9 7.6 7.2 Bexleyheath Our most significant acquisition was in Bexleyheath, South East London, where in April 2016 we purchased both the Broadway Shopping Centre and the Broadway Square Retail Park for a total cost of £120.3 million at a blended equivalent yield of 7.0%. The assets were acquired from an institutional vendor, and represent NewRiver’s largest single asset acquisition to date. The Bexleyheath assets were 100% occupied at acquisition, and provide a balanced range of convenience, food and fashion retailers to the local community, in‑line with our wider portfolio. In total, the assets comprise 525,000 sq ft of space, representing over 60% of the town’s retail space and provide the principal retail destination for a South East London borough earmarked for significant growth with attractive and sustained footfall of over 9 million per annum. We believe that the assets are well placed to benefit from rental growth due to the combination of an affluent and growing local population, high occupancy and strong underlying retailer sales. Furthermore, having purchased from an institution, at acquisition we identified a number of opportunities to use our active asset management and risk‑controlled development approach to unlock capital growth. We have been active in the year since acquisition, completing 23,300 sq ft of leasing activity with WH Smiths, Vodafone, Card Factory, Claire’s and McDonalds and improving the rental tone of the shopping centre by 15% which is already ahead of our underwriting assumptions. On 13 April 2017, following a comprehensive fit out, London based Morleys Department Stores opened at the centre in the 40,000 sq ft unit vacated by BHS in August 2016. The opening of this new store has been a real success for Morleys, and we have benefitted from increased footfall across the rest of the shopping centre. After absorbing acquisition costs, we have already seen a 3.7% capital return in our first year of ownership, and as we underwrite all acquisitions on a five year view we have identified a number of other active asset management initiatives which we will roll out over the next few years. We have worked in partnership with the London Borough of Bexley to design a masterplan for the shopping centre, retail park and surrounding council owned land. As part of this process we have identified the potential to build a number of towers in the airspace above our existing ownership, and whilst we are unlikely to build all of these towers, we have now included provision for up to 300 units within the ‘early feasibility stage’ section of our risk‑controlled development pipeline. Importantly, although we commissioned a structural assessment of the assets as part of our pre‑acquisition due diligence, we did not include any upside regarding the development potential in our conservative acquisition underwriting assumptions. Dumfries In June 2016, we completed the acquisition of Cuckoo Bridge Retail Park, Dumfries, in an off‑market transaction for total consideration of £20.2 million. The asset is 100% occupied and comprises 130,000 sq ft of income generating space across seven retail and two drive through units, with 550 car park spaces. The acquisition equated to an equivalent yield of 7.9% with net rental income of £1.5 million per annum and a weighted average lease expiry at acquisition of 8.3 years. Cuckoo Bridge is the dominant retail park in Dumfries, with a strong and isolated catchment, and is located adjacent to a 24 hour Tesco supermarket which provides the main food offer for the town. Anchored by Homebase, the retail park offers a good mix of occupiers including B&M, Poundstretcher, Laura Ashley, KFC and Costa Coffee. At the time of acquisition, we identified several opportunities to drive income and capital growth by further improving the occupier line‑up and have 28 NewRiver REIT plc Annual Report and Accounts 2017 agreed heads of terms with a fashion/homeware occupier to introduce a 20,000 sq ft full line store subject to obtaining planning consent which is anticipated in the next few months. Sheffield In September 2016, we moved quickly to complete the acquisition of a retail warehouse in Sheffield from an open‑ended property fund for £17.9 million, representing an equivalent yield of 7.6%. The 11 acre site comprises a 110,000 sq ft retail warehouse unit and 580 car parking spaces, and is well located 2.5 miles east of Sheffield city centre and in close proximity to Meadowhall shopping centre. The asset presented an attractive value‑creating opportunity for NewRiver with the unit let to a home improvement retailer no longer in occupation due to over representation in the area. As we completed the acquisition, we simultaneously exchanged contracts with the home improvement retailer to accept a surrender premium of up to £12.25 million to release them from their lease obligations, meaning that in essence we acquired a prominently located retail warehouse for £6 million or less than £55 per sq ft in capital value terms. The timing of the surrender premium was flexible, and we had until early May 2017 to exercise the option. Since acquisition, we have made good progress in our plans to reposition the asset and in March 2017, 1 Broadway Shopping Centre & Broadway Square Retail Park, Bexleyheath 2 Spital Co‑op, Chesterfield having moved into advanced negotiations with a number of potential occupiers and purchasers, we requested and received a surrender premium of £10.8 million, having received £0.7 million of rent in the interim. While our plans are not final at this stage, it is likely we will subdivide the existing retail warehouse into 4‑5 units, build two drive through units in the car park and sell a portion of the site to a value food retailer or a self‑storage operator. Pleasingly, at 31 March 2017 the asset has been valued at over 50% more than our effective purchase price. Profitable capital recycling Since 1 April 2016 we have completed £10.7 million of disposals, on terms 7% ahead of valuation and almost 30% ahead of total cost (being purchase price plus subsequent capex). During the year we completed the disposal of two assets which were acquired in July 2015 as part of the Ramsay portfolio. At acquisition, the Ramsay portfolio included nine retail parks and four development sites located adjacent to upper‑quartile performing Morrison’s foodstores. In August 2016 we sold a development site in Newquay for £700,000, and in September we sold Leafield Retail Park in Dumfries for £2.7 million. These disposals were completed marginally ahead of March 2016 book value, and 33% ahead of the price paid in July 2015. We made a number of disposals across our pub portfolio comprising pub sales to tenants, sales of non‑core ancillary land and the sale of our first convenience store. In total we sold seven pubs for £4.1 million, a 10% premium to March 2016 valuation, and over a 30% premium to purchase price. We sold two plots of land adjacent to pubs at the Royal Oak, Kings Bromley and the Ostrich Inn, Longford for £86,000 in aggregate. These plots were held at zero value, and so although small in size they demonstrate the incremental value we are able to extract from the pub portfolio. In early 2017 we decided to test the convenience store investment market by offering the Spital Lane Co‑op, a c‑store pub conversion completed in April 2016 and let to the Co‑op on a 15 year RPI linked lease, for sale at auction. The auction was held in February 2017 and the c‑store was sold to a private investor for £970,000, representing an initial yield of 4.85%, and over 11% ahead of valuation. We will continue to recycle mature assets, assets where our estimates of forward looking returns are below acceptable levels and assets where we believe that the risk profile has changed. NewRiver REIT plc Annual Report and Accounts 2017 29 STRATEGIC REPORT PROPERTY REVIEW CONTINUED – ACQUISITIONS Business model delivering: Ramsay retail warehouse portfolio The Ramsay Portfolio was acquired in July 2015 for a total consideration of £69.1 million reflecting a net initial yield of 8.0%. Since acquisition we have created unlevered returns of £14.9m and an unlevered Internal Rate of Return (IRR) of 8%. D is c i p li n e d stock selectio n Portfolio acquired for £69.1m (NIY 8.0%) in July 2015 Net income received* £8.1m £14.9m of returns generated to date unlevered IRR: 8% cycling l re a t i p a c e l b a t f o r P Cash profit on disposal* £3.3m 3 Assets sold for £12.4m +36% vs purchase price * Since acquisition 30 NewRiver REIT plc Annual Report and Accounts 2017 Active ass e t m a n a g e m e n t a n d risk controlle Capital uplift* £3.5m New lettings/renewals secured on c.20% of lettable space d development Disciplined stock selection Comprised 463,000 sq ft of lettable space across 13 geographically diverse assets adjacent to upper-quartile performing Morrisons food stores. 9 conveniently positioned retail parks 4 development sites each with approved planing consents Active asset management New lettings/renewals secured on almost 20% (91,000 sq ft) of the total 463,000 sq ft of lettable space acquired Risk-controlled development Planning granted on 62,000 sq ft retail park development at Canvey Island Planning submitted in Stamford for 100 residential units in March 2017 Stamford plan 52% pre-let Canvey Island CGI Profitable capital recycling Glasgow (development site) Newquay (development site) Dumfries Leafield Retail Park Acquisition £m 6.4 0.5 2.2 9.1 Disposal £m 9.0 0.7 2.7 12.4 Profit £m 2.6 0.2 0.5 3.3 Disposal Date Jan‑16 Aug‑16 Sep‑16 NewRiver REIT plc Annual Report and Accounts 2017 31 STRATEGIC REPORT PROPERTY REVIEW CONTINUED Active asset management footfall was down almost 9% mainly due to the volume of ongoing development and enhancement works at the centre, such as the new Next anchor store which opened in December 2016, which we believe will drive future footfall. Reflecting the impact of our actions, we saw ERV growth of almost 7% in the year at the Abbey Centre, and a capital return of almost 3%. A year ago we had exposure of 1% of total rent to BHS, spread across three centres. Ahead of the BHS administration, we advanced plans to secure alternative occupiers and we have made good progress in re‑letting these units. At the Abbey Centre, we agreed a temporary letting of the former BHS unit to Dunnes Stores, the leading Irish department store operator, to allow them to continue to trade whilst we extend their current unit by 15,000 sq ft. We have terms agreed with a best in class retailer to take occupation of the 40,000 sq ft former BHS unit at the end of the temporary Dunnes lease. At Priory Meadow, Hastings we have terms agreed with a major flagship retailer that we believe will be a major attraction to the centre and at the Burns Mall Shopping Centre, Kilmarnock, we are actively pursuing a subdivision and are in discussions with a range of retail and leisure operators. As well as our shopping centre portfolio, we remained active across our retail warehouse portfolio. During the year we completed a comprehensive programme of asset management enhancements at Clough Road Retail Park in Hull, having acquired the asset in June 2014 as part of the Linear Portfolio. We paid £7.5 million for the 95,500 sq ft park which was only 85% let, was in need of investment and had adjacent PC World and Currys units. Within a year of acquisition, we had let the vacant unit to Go Outdoors and the park was fully occupied. In the year under review, we signed a new 10 year lease with Currys and negotiated the surrender of the PC World unit, which we then sub‑divided and re‑let to Office Outlet and Halfords at an improved rental level. In November 2016, we completed the construction of a Costa coffee pod in the car park, signed on a 15 year lease, taking total investment in the asset to £1.2 million, and driving a valuation uplift since acquisition of over 30%. Our active asset management is a key driver of long‑term capital value and the generation of cash returns to shareholders. We have an active and hands on approach to asset management utilising our in‑house expertise, a deep understanding of our market and strong relationships with our occupiers which means we are able to deliver the right space in the right locations. Retail We continued to sign leases on terms ahead of valuers’ estimates in the year, completing 333 new lettings and renewals across our retail portfolio, with long term deals secured on average 3.9% ahead of March 2016 ERV. These deals were spread evenly over the year, across 993,300 sq ft which is over 10% of the lettable space in our retail portfolio, reflecting our active asset management approach. Our increased scale means that we can offer occupiers the opportunity to complete deals on a portfolio basis and during the year we completed 8 lease renewals with Peacocks/Edinburgh Woollen Mill across 54,400 sq ft, securing a 13.4% increase in passing rent to £634,000. This high volume of leasing activity means that our occupancy rate was 97% at March 2017, a significant increase from 96% in March 2016. Our average rents remain affordable at £12.45 per sq ft, with the increase from £12.14 at March 2016 due predominantly to the assets purchased in Bexleyheath. The combination of our high occupancy and affordable average rents indicates to us that retailers are trading profitably at our assets, underpinning the sustainability of our income. This affordability will be further supported by the 2017 business rates revaluation, with draft rateable values showing that across our retail portfolio in England, Scotland and Wales rateable values will fall by over 19% on average, with over 90% of our occupiers benefitting from this saving. Footfall across the shopping centre portfolio totalled 149 million during the year, up 0.5% compared to last year on a like‑for‑like basis and outperforming the national benchmark by 210 bps. Footfall was particularly strong at assets where we have recently completed active asset management or risk‑controlled development initiatives. For example, at The Forum Shopping Centre, Wallsend, like‑for‑like footfall was up 11%, due principally to the opening of a new 18,500 sq ft Aldi and 1,450 sq ft Burger King in the second half of the year. Downward footfall movements were often linked to ongoing and planned development activity. For example, at the Abbey Centre, Newtownabbey, 32 NewRiver REIT plc Annual Report and Accounts 2017 Retail highlights Occupancy 97% New lettings and renewals 333 Average rents per sq ft £12.45 Shopping centre footfall 149m Occupiers 2,000 Total retail space 8.1m sq ft Morleys department store, Broadway Shopping Centre, Bexleyheath (former BHS unit) Clough Road Retail Park, Hull Aldi and Burger King, Forum Shopping Centre, Wallsend Primark, Abbey Centre, Newtownabbey NewRiver REIT plc Annual Report and Accounts 2017 33 STRATEGIC REPORT PROPERTY REVIEW CONTINUED – ACTIVE ASSET MANAGEMENT Marketing & commercialisation The principal objective of our shopping centre marketing is to drive footfall, dwell time and spend because if our retailers are successful, our shopping centres and our business are successful. We seek to achieve these marketing objectives by delivering an outstanding customer experience through innovative, high‑quality and consistent marketing. In today’s retail and leisure environment achieving these objectives requires highly targeted, smart and creative marketing by working in close partnership with our retailers to ensure that our marketing achieves the greatest return on investment. Successful engagement with our shoppers and retailers relies on a detailed understanding of our shoppers’ needs and the goals and challenges of our retailers. To this effect, this year we have begun developing bespoke retailer campaigns that utilise the brands of the world‑class retailers we have within our portfolio to deliver marketing campaigns that integrate the brick and click by driving click and collect usage for our physical store retailers. Our 33 shopping centres are convenience‑led, community‑focused retail and leisure hubs so providing consistent convenience, affordability and accessibility is paramount. Our 2017 shopping centre consumer surveys reported a 4‑fold increase in the usage of click and collect at our centres, with 2.3% of shoppers who visited using click and collect, up from 0.6% in 2015. In 2017, the average click and collect spend (online spend collected at the centre) was £44. Importantly, 57% of those shoppers went on to make an additional spend of £24.82 on retail and 24% made an additional spend of £5.40 on catering. The NewRiver click and collect shopper is therefore worth an average of £60 versus the non‑click and collect shopper who is spending £25.46 on average per visit. In summary, from 2015 we have grown click and collect user volumes by almost four times, those shoppers are worth over twice as much as the non‑user and are a highly valuable customer to target for the benefit of our retailers. We are working on ways to bridge the gap between online and offline shopping across our portfolio and channel customer spend back into store. During this financial year we ran a sector‑first marketing initiative with Amazon called “Lucky Codes”, becoming the first UK shopping centre owner to partner with Amazon in a bespoke campaign to drive awareness and usage of the Amazon Lockers located at 20 of our centres. Importantly, it was an exciting opportunity for us to offer our customers new ways to shop with us. Click and collect works well for both our customers and our shopping centres. Our customers enjoy free and convenient deliveries and returns whilst our centres benefit from uplifts in sales and footfall as a result of people choosing the lockers as their means of delivery. The Outcome: • Lucky Codes rewarded customers using the lockers and shopping in the centre between Black Friday (25 November 2016) through to 2 December 2016 and featured a fully integrated marketing campaign. • The campaign was targeted specifically at the over 35 age bracket linked to research recently published by Savills that the Over 35’s are the largest users of click and collect, with a large number owning their own houses, cars and having families as well as being primary shoppers within the NewRiver portfolio. We therefore saw an opportunity to capture a new customer within our catchments. • 18,000 emails were issued from Amazon to their Amazon customers within the postcode sectors of all 20 participating centres. That email achieved a 28% open‑rate, being opened by over 5,000 customers who are now aware they can click and collect at our centres. • As a result of the campaign, footfall across the participating centres was +4% and was +2% ahead of the target. • Amazon Locker usage was up +40% and +30% ahead of target. We continue to drive our marketing forward creating significant economies of scale as we drive innovation, improve sophistication, consistency and co‑ordination at a corporate and asset level in a variety of ways to ensure our shoppers are happy and our marketing is achieving the greatest return on investment for our retailers. 34 NewRiver REIT plc Annual Report and Accounts 2017 Increasing the volume of commercialisation activity across our retail portfolio has been an area of focus for NewRiver for a number of years, as it represents a significant opportunity to generate incremental income from our existing assets as well as increasing customer dwell time and basket spend. During the year to March 2017, commercialisation income grew by an impressive 41% to £3.2 million from £2.3 million in March 2016. Whilst this increase was fuelled by acquisitions, even on a like‑for‑like basis the growth was still almost 9%. Highlights for the year have included investing in purpose‑built kiosks for temporary promotions to improve mall aesthetics. They have also generated increased income and a second phase of investment is now underway. We have seen a dramatic improvement in mall aesthetics with over 80 bespoke mall kiosks now installed, 26 of which are independent retailers all investing in a future with NewRiver. At Bexleyheath we have introduced Krispy Kreme and Mr Pretzels to our portfolio, both of which are now in discussions to expand across other centres in the portfolio. During the year we signed ten year leases with our preferred mobile phone accessories operator, Top Gift, which include scheduled kiosk upgrades to keep the offer fresh. Contracts are now also in place with Elonex for the installation of digital advertising screens in the 17 centres and four further centres now have large format external advertising panels. Beach event at Priory Meadow Shopping Centre, Hastings New café opening at Morleys. Broadway Shopping Centre, Bexleyheath Fashion event at Hillstreet Shopping Centre, Middlesbrough Fitness event at Hillstreet Shopping Centre, Middlesbrough Amazon locker at Hildreds Shopping Centre, Skegness NewRiver REIT plc Annual Report and Accounts 2017 35 STRATEGIC REPORT PROPERTY REVIEW CONTINUED – ACTIVE ASSET MANAGEMENT Pubs Pub portfolio movements Trent Mantle Total # Pubs acquired 202 158 360 Pubs sold (2) – (2) Closed for C‑store conversion (3) – (3) # Pubs held at 31 March 2016 197 158 355 Closed for C‑store conversion (4) – (4) # Pubs held at 31 March 2017 189 155 344 Pubs sold (4) (3) (7) to vacate, we will implement our tried and tested lettings programme to recruit high quality publicans who will continue to grow the business. Throughout the transfer programme we are working closely with Marston’s to ensure that the process is as smooth as possible. Trent portfolio transfer programme Transferred to NewRiver Leaseback surrendered and new 15 year leases agreed in FY17 Closed for refurbishment/for disposal in FY17 Pubs to be transferred in tranches in the coming months Trent pubs held at 31 March 2017 44 22* 2 123 189 * 21 pubs transferred per the NewRiver REIT plc Third Quarter Company Update, with one additional pub added subsequently Across our entire pub portfolio we are making targeted capital investment in order to drive trade and increase values. Since 1 April 2016, we have completed works on nine of our pubs, investing more than £100,000 in projects including external redecoration and improved signage to enhance curb appeal, internal refurbishment to enhance the customer experience and extensive works to improve kitchens, toilets and tenant accommodation. At those pubs where we have completed refurbishment works we have seen significant improvements to both rental income and sales volumes, and we have a further £2.3 million of capital expenditure planned over the next twelve months. Lastly, as part of the 2017 business rates revaluation our pub operators will save 40% on average on business rates from 1 April 2017 when the business rate relief threshold rose from £6,000 to £12,000. In October 2013, we acquired a portfolio of 202 pubs from Marston’s Plc (the ‘Trent’ portfolio). Each pub in the portfolio was handpicked by management for its high roadside visibility, high passing footfall and prominent location, with the intention of converting a significant number of them for retail/residential use. The pubs in the portfolio traded strongly, with high occupancy and strong income returns, and consequently in August 2015 we acquired a second portfolio of 158 pubs from Punch Taverns (the ‘Mantle’ portfolio). We have since sold nine pubs, many of which were to existing tenants, and closed seven for convenience store conversion meaning we now have 344 pubs remaining in our portfolio. At the time of the Trent portfolio acquisition, we signed a four year leaseback agreement with Marston’s Plc, which comes to an end at the end of 2017. We have been active in negotiating the transfer of a number of pubs in advance of the deadline, with 35 pubs transferred to NewRiver with existing tenancies in place and 9 pubs transferred to be operated by LT Management, the specialist pub management company that already manages the Mantle portfolio on our behalf. Further to these transfers, in December 2016 we secured contracted income on 22 pubs by surrendering the leaseback arrangement 13 months early and agreeing new 15 year RPI linked leases with Marston’s PLC. We have in place a structured programme to transfer the remaining 123 Trent pubs to the management of NewRiver and LT Management, and through a detailed estate review, involving all relevant stakeholders, we have split the transfer into small batches in order to manage the programme effectively. The first tranche of pubs will be transferred in May 2017 with the last batch transferring by the end of the agreement. Throughout the programme our team will be visiting each site and working with the publicans to ensure a smooth transition. We are confident that the majority of publicans will remain in their pubs during the transfer and our operations managers and instructed solicitors will ensure that new leases and tenancies are implemented seamlessly. For the minority of pubs where the publican intends 36 NewRiver REIT plc Annual Report and Accounts 2017 Before – West Hill Tavern, Brighton After – West Hill Tavern, Brighton Ashmore Inn, Wolverhampton (Griffiths Drive Co‑op) Stubby Lane Co‑op & Ashmore Inn, Wednesfield Hope & Anchor, Ross on Wye Nags Head, Buckingham Luckwell Hotel, Bristol NewRiver REIT plc Annual Report and Accounts 2017 37 STRATEGIC REPORT PROPERTY REVIEW CONTINUED – ACTIVE ASSET MANAGEMENT Creating an exciting retail and leisure destination in the heart of the community The Abbey Centre, Newtownabbey Acquired from the Royal Bank of Scotland in August 2014 as part of the ‘Swallowtail’ shopping centre portfolio, along with Priory Meadow in Hastings and The Avenue in Newton Mearns. Key facts since acquisition Total retail space 320,000 sq ft Increased by 21% Valuation £81.6m Increased from £62.6m Total capex spend £7.0m Total return 32% Since acquisition 38 NewRiver REIT plc Annual Report and Accounts 2017 S H O E Z O N E C L A R K S S H O E S B O N M A R C H E SU P ER DR U G HE ALT H & B EAU T Y ST OR E CL A IR E` S L A CC ES S P RE M I E R M E A T S B U T E E T E L F R S A L L Y ’ S G E E VIL N C L A H ST O RE ST O E R O T S E N O H P R E B U L E T O T N E G R A A X A S T F I G & Y R O T C A F S D R A C D R A C S S A P S E R T X E C T T E R R A B & D N A L L O H N A I C I T P O S R E V A S C E P S K O O C T N E G A S A M O H T L E V A R T U S C L A D I E S & M E N S W E A R P E R FUM E S HO P H L T H & B E A L E U M R E L L E A S H W E J S E N O J R T S E L E L N E R E W E J S K R O W E H T O R E N E F F A C T E M P O R A R Y ( F O R M E R B H S U N I T ) E X T E N S I O N C O M I N G S O O N DV S CL O T HI NG N E W L Y D E V E L O P E D U N I T O P E N E D D E C E M B E R 2 0 1 6 A R O D N A P S T F I G E R O T S E E K N A Y E N O E S S E N U O O H P E H P R H E R A A C L E T W E H T Z I U Q R A E W S E I D A L C N I & R S E A E W E U L B I D A L S N E M 3 S T O R E T E L P O U N D L A N D DI S CO UN T ST OR E D A N S K E B A N K T N E G S K A S W N O S O O B A E E N & Y C A M R A H P R A E L C O 2 T EL EP HO N ES P E T ER MA R K HA I R DR E SS IN G Z I PS & R I PS C L O A L T O ` BR I EN S S/ W B AR R A P M A E I T A R C / I L E G S D Y T N I L I C B N O S E P O P M I T H S E R H S F F O C A T S O C BO O T S OP T I C IA NS S E N O U 4 S E N O H P H P E L E T S N O S I B & F N O C T N R O H T E M S E M A G A G R E T U P M O C H A L I F A X BA NK C O M I N G S O O N T S E R D F / F G N I K R E G R U B N A N D O S T S E R C F K D F / F E L D E Z T G N A Y T D S F E O R O A B / F R N S M A N R A B S S E R P X E N O I S I V I C I T P O N A S E N O J & K C A J S R E V A P E G U O V E N R Y B D N A E G N Y S D L R T N E M P I U Q E R E T U P M O T N A C A V R E H C T E R T S D N U O P E R O T S T N U O C S D I T N A C A V Doubling Dunnes Stores Increased the retail space from 20k sq ft to 35k sq ft T E M P O R A R Y ( F O R M E R B H S U N I T ) E X T E N S I O N C O M I N G S O O N DELIVERING OUR BUSINESS MODEL Active asset management and risk controlled development S H O E Z O N E C L A R K S S H O E S ST OR E CL A IR E` S L A CC ES S P RE M I E R M E A T S B U T E E T E L ST O RE ST O Y R S T O T F I G C A F & S D R A C D R A C F R E VIL N C L A H G E O T N E G R A A X A E R O T S E N O H P R E L B U E T X E C S S A P S E R T N A I C I T P O S R E V A S C E P S T T E R R A B & D N A L L O H K O O C T N E G A S A M O L E V A H R T T B O N M A R C H E SU P ER DR U G HE ALT H & B EAU T Y S A L L Y ’ S DV S CL O T HI NG S E N O J S E N O J & K C A J S R E V A P U S C L A D I E S & M E N S W E A R P E R FUM E S HO P H L T H & B E A A R O D N A P S S E N A I C I T P O R P X E N O I S I V S T F I G E R O T S E E K N A Y E G U O V E N R Y B D N A E G N Y S O R E N E F F A C S K R O W E H T T S E N R E R E L L E W E J R E L L E W E J L E U M A S H E N O H P R A C E S U O H E R A W S E N O H P E L E T E H T Z I U Q R A E W S E I D A L C N I & S E I E U L B D A L R A E W S N E M 3 S T O R E T E L P O U N D L A N D DI S CO UN T ST OR E D A N S K E B A N K T N E G A S W E N N O S A E S K O O B Y C A M R A H P R A E L C & U 4 S E N O H P E L E T S E N O H P R A P M A E R C / I I T A L E G S D N Y T I C I L B N O S P M I T E O H S P E R S I B & S N O T N R O H T F N O C E M A G S E M A G R E T U P M O C O 2 T EL EP HO N ES P E T ER MA R K HA I R DR E SS IN G Z I PS & R I PS C L O A L T O ` BR I EN S S/ W B AR C F K T S E R D F / F S M A N R A B E Z T G N A Y E L D O O N T S E R R A B D F / F New Look To occupy the former 15k sq ft Next store D L R T N E M P I U Q E R E T U P M O T N A C A V R E H C T E R T S D N U O P E R O T S T N U O C S I D T N A C A V N E W L Y D E V E L O P E D U N I T O P E N E D D E C E M B E R 2 0 1 6 H S F F O C A T S O C BO O T S OP T I C IA NS H A L I F A X BA NK C O M I N G S O O N T S E R D F / F G N I K R E G R U B N A N D O S Next upsize +29k sq ft to 44k sq ft Nandos opened in April 2017 3.5k sq ft New occupiers introduced Upsized occupiers NewRiver REIT plc Annual Report and Accounts 2017 39 STRATEGIC REPORT PROPERTY REVIEW CONTINUED Risk-controlled development Total development pipeline Completed in period/Under construction Planning granted In planning Pre‑planning Near‑term pipeline Early feasibility stages Total pipeline * Excluding residential Shopping Centre Sq ft Retail Warehouse Sq ft Hotel Sq ft C‑stores Sq ft Residential Sq ft Total Pipeline Sq ft 59,000 279,300 6,600 – 344,900 127,600 3,300 65,600 12,000 32,000 112,900 68,400 – 58,400 29,300 – 87,700 30,000 40,800 56,900 13,500 17,100 128,300 – – 220,400 340,800 171,700 103,100 680,600 402,200 220,800 732,900 1,406,700 517,900 291,900 472,500 181,300 117,700 128,300 1,024,800 1,924,600 Let/ Pre‑let* % 100 59 70 35 We have made significant progress on our risk‑controlled development pipeline which now totals 1.9 million sq ft (1.4 million sq ft in the near‑term) across our retail (1,653,100 sq ft) and pub (271,500 sq ft) portfolios, and which we believe will be a key driver of long term returns for our shareholders. Our development strategy includes: • Regeneration of existing space (e.g. new food court at Montague Centre, Worthing) • Development of sites acquired in portfolio acquisitions (e.g. Canvey Island retail park) • Capitalising on opportunities above or adjacent to existing assets (e.g. Cowley, Oxford, new build c‑store/residential development) • Complete redevelopment of existing assets (e.g. Burgess Hill, c‑store/residential pub conversions) During the period, we completed 77,100 sq ft of development across 11 assets, with 26,000 sq ft of development currently under construction. Since the start of the period, we have secured planning permission for 192,900 sq ft of development, including Canvey Island Retail Park and an 85 bedroom hotel in Romford. We have submitted planning applications on 384,800 sq ft of development, including 236,000 sq ft mixed‑use regeneration in Cowley, Oxford and a 100 unit residential scheme in Stamford. Retail Completed in period/Under construction Abbey Centre, Newtownabbey: At the Abbey Centre, located 6 miles to the north of Belfast, a new 44,000 sq ft Next anchor store was handed over for fit‑out in August 2016 on schedule and within budget and Next were delighted with the finished product. The store opened on 14 December 2016 Retail portfolio development pipeline Shopping Centre Sq ft 59,000 279,300 6,600 – 344,900 127,600 Retail Warehouse Sq ft 3,300 65,600 12,000 32,000 112,900 68,400 Hotel Sq ft – 58,400 29,300 – 87,700 30,000 Residential Sq ft – 161,700 300,200 147,800 Total Pipeline Sq ft 62,300 565,000 348,100 179,800 609,700 271,900 1,155,200 497,900 472,500 181,300 117,700 881,600 1,653,100 Let/ Pre‑let* % 100 53 61 n/a Completed in period/Under construction Planning granted In planning Pre‑planning Near‑term pipeline Early feasibility stages Total Retail pipeline * Excluding residential 40 NewRiver REIT plc Annual Report and Accounts 2017 and we understand that early trading has been ahead of forecast. We are now on‑site with the subsequent phase of development works at the centre, constructing a 15,000 sq ft extension to create a 35,000 sq ft flagship unit for Dunnes Stores, the leading Irish department store operator, which we will hand over for fit‑out works by the end of the summer 2017. Planning granted Canvey Island: We acquired the site in Canvey Island, Essex, in July 2015 as part of the Ramsay portfolio, and submitted a planning application in June 2016 to create a 62,000 sq ft (87,000 sq ft including mezzanine) retail park. We received planning consent in early November 2016, and this consent was granted with no section 106 requirement nor any restriction on opening hours. The park is already 52% pre‑let to B&M and Sports Direct, with a further 23% in solicitors’ hands. This pre‑letting activity has significantly de‑risked the development, and so it is our intention to begin onsite works within the next six months. Burgess Hill: We secured full detailed planning consent for our £65 million mixed‑use redevelopment of Burgess Hill town centre in March 2016. The 465,000 sq ft project will provide a 10‑screen multiplex cinema, a 63 bed hotel pre‑let to Travelodge, a higher quality retail offer and new restaurant and leisure provisions, 174 additional car park spaces and an improved public realm, together with 142 new residential units and a new purpose built library. In the first half of the financial year, we exchanged contracts with Cineworld so that at 30 September 2016, the retail and leisure element of the scheme was 41% pre‑let. Since then we have exchanged contracts on a further 24,500 sq ft with Next and Nandos, meaning that the retail and leisure element of the scheme is now 49% pre‑let, with a further 10% in solicitors’ hands. On the residential element of the scheme, we have terms agreed with a residential investment company for a significant pre‑sale. In order to facilitate the development, we have agreed terms with Lidl and Iceland to surrender and relocate to sites adjacent to the shopping centre, as well as agreeing to re‑locate the local council owned library. All of this progress means that we hope to be in a position to start on site later in the summer. In planning Cowley, Oxford: Templars Square shopping centre has been at the heart of Cowley, less than 2 miles from Oxford city centre, for over fifty years and its future success is of great importance to the local community. We have owned Templars Square since December 2012 and in November 2016 we submitted a planning application for a 236,000 sq ft mixed‑use development to rejuvenate the shopping centre, meet strong demand for new housing in the local area and add a much needed choice of restaurants and hotels to Cowley. The development will include a 71‑bed hotel, 226 new residential apartments, modernised car parks and major improvement of the public realm. The leisure element of the scheme is already 82% pre‑let, having exchanged contracts with Travelodge last year. A combination of rationalisation of the existing car park provision, capitalising on the air space above the centre and site assembly have enabled a proposal with significant massing. The existing shopping centre will continue to trade throughout and we are confident that its rental tone will benefit from the improvement works. Having completed a comprehensive programme of community engagement and consultation both prior to and following the submission of our planning application, we anticipate that our planning application will be determined at Planning Committee in July 2017. Stamford: We acquired the 8 acre site in Stamford, Lincolnshire, in July 2015 as part of the Ramsay portfolio, along with our Canvey Island development site and two other development sites. The site is well located less than 1 mile from the centre of Stamford and in March 2017 we submitted an outline planning application for the provision of up to 100 dwellings comprising a mix of house types and tenures. Pre-planning Capitol Shopping Centre, Cardiff: We are in pre‑application consultation with Cardiff Council to bring forward a major re‑positioning of the Capitol Shopping Centre, acquired in January 2016 as part of the Neptune Portfolio. The centre is well located in the city centre, benefitting from a high volume of commuter traffic from Cardiff Queen Street Station as well as a significant student population. We plan to reposition the centre as a mixed retail and leisure destination, and construct 400 student accommodation units in the air space above the centre. Early feasibility stages We believe that our risk‑controlled development pipeline will be a key driver of future growth and we are currently reviewing a number of medium‑term opportunities across our retail portfolio. These opportunities include 127,600 sq ft of extensions across our shopping centre portfolio and over 250,000 sq ft of residential potential above our Greater London shopping centres in Bexleyheath and Penge. NewRiver REIT plc Annual Report and Accounts 2017 41 STRATEGIC REPORT PROPERTY REVIEW CONTINUED – RISK‑CONTROLLED DEVELOPMENT Stamford town centre less than 1 mile Development of sites acquired in portfolio acquisitions Planning submitted: Stamford, Lincolnshire Delivering our business model Background: • We acquired the 8 acre site in Stamford, Lincolnshire, in July 2015 as part of the Ramsay portfolio • The site is located less than 1 mile from the centre of Stamford • Acquired for £1.0m in July 2015 • Valued at £2.8m in March 2017 Active asset management and risk controlled development Our proposal: • The regeneration of existing brownfield land to provide up to 100 new homes • This will assist Stamford in meeting its future housing need by providing a mix of two, three and four bedroom family homes with a range of house types • Improve and enhance habitats, introducing biodiversity through Green Infrastructure and improving connections to surrounding green spaces • Provision of two acres of public open space with linear parks connecting to existing footpath network and access to Burghley Park Progress/next steps: • We submitted an outline planning application in March 2017 • Planning to be determined Summer 2017 • If successful, sell site with the benefit of planning to return capital profit to our shareholders 42 NewRiver REIT plc Annual Report and Accounts 2017 TO LETTO LETEvelina RoadHigh StreetCentral ParadeColman HouseCroydon RoadThe Blenheim CentreArpley Square Car park surrender secured, unlocking residential development potential above shopping centre Seven miles to Central London with strong transport links Bromley council undertaking significant public realm improvements to act as catalyst for regeneration Capitalising on opportunities above or adjacent to existing assets Early feasibility stages: Blenheim Shopping Centre, Penge, London Delivering our business model Background: • Acquired from an institution in December 2015 for a total consideration of £6.9m reflecting a net initial yield of 6.2%, and an equivalent yield of 7.9% • Located in South East London, a short walk from Crystal Palace Park • Public Transport Accessibility Level score of 5 (very good) supporting high density development Active asset management and risk controlled development Our proposal: • Working to deliver a revitalised Greater London shopping centre along with significant residential development above the existing 216 space car park • Improved public realm • Modernised mall space • Upper limit of 102 residential apartments which could enable a PRS scheme Progress/next steps: • Completed surrender of the car park lease in May 2017 to unlock residential opportunity • Pre‑application submission and presentation to Bromley Council in June 2017 • Submit planning application in early 2018 NewRiver REIT plc Annual Report and Accounts 2017 43 TO LETTO LETEvelina RoadHigh StreetCentral ParadeColman HouseCroydon RoadThe Blenheim CentreArpley SquareSTRATEGIC REPORT PROPERTY REVIEW CONTINUED – RISK CONTROLLED DEVELOPMENTS Pubs portfolio development pipeline C‑stores Sq ft 40,800 56,900 13,500 17,100 128,300 – 128,300 Residential Sq ft – 58,700 40,600 23,900 123,200 20,000 143,200 Total Pipeline Sq ft 40,800 115,600 54,100 41,000 251,500 20,000 271,500 Let/ Pre‑let* % 100 100 100 100 Chesterfield, Spital Lane 11 C‑Stores delivered to Co‑op and agreement to deliver up to 40 First C-store disposal 4.85% Initial yield Completed in period/Under construction Planning granted In planning Pre‑planning Near‑term pipeline Early feasibility stages Total Pubs pipeline * Excluding residential Pubs As well as generating high levels of low risk cash returns, our portfolio of 344 pubs contains a number of inbuilt value creating development opportunities. These include the potential to build convenience stores or residential units on surplus land adjacent to pubs which was effectively acquired with zero value, and opportunities to convert pubs into convenience stores or residential units. Convenience stores We signed a conditional agreement with the Co‑operative in September 2014, which was varied in January 2016, to deliver up to 45 c‑stores for fixed lease terms of 15 years at rents ranging from £15.00‑17.50 per sq ft, with RPI linked increases capped at 4% and collared at 1%. In January 2017, we signed a supplemental agreement with the Co‑operative revising this number to 40 c‑stores. The agreement also includes performance fees of up to £3.4 million, with the first payment triggered by the delivery of our 15th c‑store to the Co‑operative, which we expect to occur in the first half of the next financial year. To date we have handed over 11 c‑stores to the Co‑op, with eight c‑stores totalling 29,800 sq ft handed over since 1 April 2016. Of the stores delivered to date, eight utilised surplus land adjacent to the existing pubs, two were pub conversions and one was a new build on a site previously occupied by a pub. We completed our first c‑store disposal, selling the Spital Lane Co‑op for £970,000 in February 2017, representing an initial yield of 4.85% and over 11% ahead of valuation. We are on site for the construction of a further three c‑stores totalling 11,000 sq ft and we have consent to construct a further 15 totalling 53,400 sq ft. 44 NewRiver REIT plc Annual Report and Accounts 2017 Convenience stores completed to date Dec 2015 Stoke-on-Trent – Heathcote Street New build Apr 2016 Chesterfield – Spital Lane Conversion Apr 2016 Wrexham – Marford Hill New build June 2016 Shifnal – High Street Conversion July 2016 Yeovil – St. Michaels Avenue New build Aug 2016 Shrewsbury – Sutton Road New build Sept 2016 Bodelwyddan – Ty Fry Lane New build Sept 2016 Wolverhampton – Griffiths Drive New build Oct 2016 Telford – Milners Lane New build Jan 2017 Kings Bromley – Manor Road New build Apr 2017 Mansfield – Southwell Road West New build Residential Our pubs portfolio development pipeline includes the potential for almost 200 residential units across 55 pub sites. To date we have received planning consent for 71 residential units across 25 pub sites, with consent received for 50 units across 16 pub sites in the current financial year. Using our in‑house residential planning expertise, our strategy with these residential opportunities is to create value by obtaining planning consent, and then to realise value by selling on to local developers. We currently have 13 opportunities on the market, five of which are in solicitors’ hands at pricing ahead of March 2017 valuation. “ The Co‑op has had a brilliant impact on the pub and already business at the start of this year has been much better than last year. Previously, people used to visit the small shopping precinct across the road and didn’t see the pub, but now that the Co‑op is here there is more passing trade and more people notice the pub and come in for a drink. Having the Co‑op here is definitely a bonus.” Allan Lockhart Property Director 15 May 2017 Kevin Ward (Publican) Ashmore Inn, Wolverhampton (Griffiths Drive Co‑op) NewRiver REIT plc Annual Report and Accounts 2017 45 STRATEGIC REPORT PROPERTY REVIEW CONTINUED – RISK CONTROLLED DEVELOPMENTS Business model delivering: Our portfolio of community pubs Our pubs account for 16% of our total portfolio. We were attracted to the sector by the strong cashflow generation and low risk characteristics, as well as the development upside. Since acquisition we have created unlevered returns of £57.5m and an unlevered Internal Rate of Return (IRR) of 16%. D is c i p li n e d stock selectio n 360 pubs acquired in 2 portfolios with a blended yield of 13% Net income received* £42.7m £57.5m of returns generated to date unlevered IRR: 16% cycling l re a t i p a c e l b a t f o r P Cash profit on disposal* £0.9m 12 Assets sold for £6.6m 9 pubs, 2 excess land, 1 c‑store * Since acquisition 46 NewRiver REIT plc Annual Report and Accounts 2017 Active ass e t Capital uplift* £13.9m 15 year RPI linked leases signed with Marston’s PLC on 22 pubs m a n a g e m e n t a n 11 C‑Stores delivered to the Co‑Op d development d risk controlle Disciplined stock selection In October 2013 we acquired a portfolio of 202 pubs from Marston’s Plc (‘Trent’ portfolio), each was handpicked by for its high roadside visibility, passing footfall and prominent location. Due to the success of the Trent portfolio, in August 2015 we acquired a portfolio of 158 public houses from Punch Taverns (‘Mantle’ portfolio). Duchess, Scarborough Trent portfolio Mantle Portfolio Total Pubs acquired 202 158 360 Closed for C‑store conversion (7) – Pubs at 31 March 2017 189 155 (7) 344 Sold (6) (3) (9) The Anchor, Canewdon Marford Hill Co‑op, Wrexham The Knockerdown, Ashbourne The Pavilion, Birmingham Active asset management On acquisition of the Trent portfolio, Marston’s entered into a leaseback agreement to manage and operate the portfolio as pubs on our behalf, which expires at the end of 2017. Ahead of this expiry we are now in the process of transferring the management of the Trent pubs from Marston’s. In December 2016 we secured contracted income on 22 pubs by surrendering the leaseback arrangement early and agreeing new 15 year RPI linked leases with Marston’s PLC. Risk-controlled development Following the Trent portfolio acquisition, we signed a conditional agreement with the Co‑operative to deliver up to 40 c‑stores for fixed lease terms of 15 years at rents ranging from £15.00‑17.50 per sq ft, with RPI linked increases capped at 4% and collared at 1%. • 11 c‑stores completed and handed over to the Co‑op to date • 3 currently under construction • 15 with planning granted • 5 in planning Profitable capital recycling Sold nine pubs for £5.5 million, over a 20% premium to purchase price. Sold two plots of land adjacent to pubs, at the Royal Oak, Kings Bromley and the Ostrich Inn, Longford for £86,000. Sold one c‑store let to the Co‑op on a 15 year RPI‑linked lease at auction. The auction was held in February 2017 and the c‑store was sold for £970,000, over 11% ahead of valuation and representing an net initial yield of 4.85%. Benefits of scale/conservative balance sheet • Refinanced debt on the Trent portfolio with major US insurance company • Reducing the cost of the facility by 30% • Increasing the cash returns from the pubs NewRiver REIT plc Annual Report and Accounts 2017 47 STRATEGIC REPORT FINANCIAL REVIEW Convenience + Community = Cash returns “ Our convenience‑led, community focused retail & leisure portfolio has delivered another highly profitable year for our shareholders” in accordance with the EPRA Best Practice Recommendations (BPR) reporting framework. We report a number of these measures because Management considers them to improve the transparency and relevance of our published results as well as the comparability with other listed European real estate companies. Definitions for APMs are included in the Glossary. The measures used in this review are all APMs presented on a proportionally consolidated basis unless otherwise stated. The APM on which Management places most focus, reflecting the Company’s commitment to driving cash income returns and growing the dividend, is Funds From Operations (‘FFO’). We feel that this measure is most appropriate when considering our dividend policy as it is a cash measure and it is familiar to non‑property and international investors. FFO is a Company measure determined by cash profits which includes realised recurring cash profits, realised cash profits or losses on the sale of properties and excludes other one off or non‑cash adjustments. Previously, we referred to this measure as EPRA Adjusted earnings. Overview Our convenience‑led, community‑focused retail and leisure portfolio has delivered another highly profitable year for our shareholders, with FFO increasing by 23.6% to £58.2 million, from £47.1 million in FY16. FFO per share was 24.9 pence, and our ordinary dividend per share increased by 8.1% to 20.0 pence (FY16: 18.5 pence). Mark Davies Chief Financial Officer Key performance measures The Group financial statements are prepared under IFRS where the Group’s interests in joint ventures are shown as a single line item on the income statement and balance sheet (in accordance with IFRS 11 Joint Arrangements) and all subsidiaries are consolidated at 100%. Management reviews the performance of the business principally on a proportionally consolidated basis which includes the Group’s share of joint ventures on a line‑by‑line basis. The Group’s financial key performance indicators are also presented on this basis. Alternative Performance Measures (‘APMs’), being financial measures which are not specified under IFRS, are also used by Management to assess the Group’s performance. These APMs include a number of European Public Real Estate Association (‘EPRA’) measures, prepared The finance and corporate team to take us forward Will Hobman Head of Investor Relations Rob Marcus Head of Finance Kathy Sams Financial Controller – Property Sara Shipton Financial Controller – Pubs and Leisure Patrick Colgan Corporate Finance Debbie Underwood Executive Assistant to CFO 48 NewRiver REIT plc Annual Report and Accounts 2017 Highlights • FFO increased by 23.6% to £58.2 million • IFRS profit after tax of £36.2 million (FY16: £47.1 million) delivering an FFO per share of 24.9 pence • Ordinary dividend per share increased by 8.1% to 20.0 pence (FY16: 18.5 pence) and fully covered in line with Company’s Financial Policy • Special dividend declared of 3.0 pence per share taking total dividend to 23.0 pence, an increase of 24.3% on prior year • FY18 first quarter dividend announced today of 5.25 pence per share, an increase of 5.0% (Q1 FY17: 5.00 pence) • EPRA NAV per share decreased by 1.0% to 292 pence (March 2016: 295 pence); increased from 290 pence reported in H1 due to capital return of +0.5% in H2 (FY16: £69.4 million) including £19.4 million of non‑cash fair value reductions; IFRS basic EPS 15.5 pence (FY16 39.2 pence); IFRS net assets £684.5 million (March 2016: £689.9 million) • Total accounting return (dividend paid basis) +5.7%; total accounting return (dividend declared basis) +6.8% • Loan to value increased to 37% (March 2016: 27%) due to £158.4 million of acquisitions completed in the period; well within the Company’s stated Financial Policy • Cost of debt 3.5% (March 2016: 3.7%); interest cover of 4.5x (March 2016: 4.3x) • Refinancing exercise underway, expected to complete in FY18 with Management intending to increase maturity and convert the majority of the Company’s debt to unsecured Reflecting our commitment to continue to deliver growing cash returns to shareholders, we declared a special dividend of 3.0 pence per share taking our fully covered total dividend for the year to 23.0 pence, an increase on FY16 of 24.3%. Including the special dividend and based on our opening EPRA NAV per share, we provided a high income yield of 7.8% to our shareholders. IFRS Profit for the period after tax of £36.2 million decreased by £33.2 million from £69.4 million in FY16 due predominantly to £24.0 million of non‑cash property revaluation surplus generated in FY16, compared to a decline of £15.4 million and some mark to market non‑cash adjustments to interest rate instruments in the current year. IFRS net assets have proved robust decreasing by only 0.8% to £684.5 million, from £689.9 million at 31 March 2016. When our portfolio was last independently valued in September 2016 we reported IFRS net assets of £674.6 million, reflecting exceptional costs linked to our move to the Main Market as well as the adverse impact of the EU Referendum on our portfolio valuation, and so we are pleased to report a positive NAV performance in the second half of the year. EPRA NAV per share decreased by 1.0% to 292 pence per share, from 295 pence per share at 31 March 2016. Our operations are underpinned by a conservatively positioned balance sheet which we have maintained well within our stated Financial Policies, with LTV of 37% (March 2016: 27%) and interest cover of 4.5x (March 2016: 4.3x). The increase in LTV was due predominantly to the acquisition of our assets in Bexleyheath which completed in April 2016, and on a proforma basis our LTV at March 2016 was 35%. This acquisition was completed utilising our existing cash resources and taking on a new debt facility, which, along with our other refinancing activities, contributed to the reduction in our cost of debt from 3.7% in March 2016 to 3.5% in March 2017. The provider of the new facility, DekaBank, was keen to put in place a longer term loan but we agreed to just a two year maturity, knowing that a balance sheet refinance in the near future would be a more effective longer term solution. This meant that as at 31 March 2017 our weighted average debt maturity was deliberately lower at 2.5 years. We recently appointed Rothschild & Co as independent debt advisor to assist Management in completing this refinancing in the next twelve months. A low debt maturity puts the Company in the best possible position to complete this exercise in a cost‑efficient and timely manner, maximising the cost benefit to our shareholders. As part of the proposed refinancing, we intend to increase our debt maturity and become an issuer of unsecured debt. Reflecting our confidence in the strength and sustainability of our underlying cash profits, the Board has approved a Q1 FY18 dividend of 5.25 pence per share, a further increase of 5% (Q1 FY17 5.00 pence). NewRiver REIT plc Annual Report and Accounts 2017 49 STRATEGIC REPORT FINANCIAL REVIEW CONTINUED Reconciliation of IFRS profit after taxation to Funds From Operations IFRS proft for the year after taxation Adjustments Revaluation of investment properties Revaluation of joint ventures’ investment properties Revaluation of derivatives Revaluation of joint ventures’ derivatives Share‑based payment charge Exceptional cost in respect of move to the Main Market Funds From Operations 31 March 2017 £’000 36,201 31 March 2016 £’000 69,409 15,030 419 3,607 350 1,434 1,191 58,232 (19,513) (4,489) – – 808 900 47,115 Income statement Funds From Operations is represented on a proportionally consolidated basis in the table below. 31 March 2017 Joint ventures £’000 10,557 (1,212) 9,345 (831) (1,930) (551) – 6,033 Group £’000 96,100 (15,705) 80,395 (12,750) (15,139) 894 (1,201) 52,199 Proportionally consolidated £’000 106,657 (16,917) 89,740 (13,581) (17,069) 343 (1,201) 58,232 24.9 23.0 108% 15.1% 3.5% 31 March 2016 Proportionally consolidated £’000 74,874 (7,721) 67,153 (12,699) (15,519) 8,316 (136) 47,115 26.6 18.5 144% 18.5% 3.7% INCOME STATEMENT Gross income Property operating expenses Net property income Administrative expenses Net financing costs Profit on disposal of investment properties Taxation Funds From Operations FFO per share (pence) Dividend per share1 (pence) Dividend Cover Admin cost ratio Cost of debt 1. Including 3.0 pence special dividend in FY17 Funds From Operations bridge (£m) Recurring FFO ) 1 . 1 ( . 3 0 . 4 6 4 . 3 0 5 . 1 1 . 2 8 5 . 5 4 3 . 7 2 1 ) 3 4 . ( Bravo JV Promote FY16 Recurring FFO Net acquisitions Taxation Other FY17 Recurring FFO FY17 profit on disposal Sheffield transaction FY17 FFO 19.6p 19.5p 20.4p 19.8p 1 . 7 4 ) . 3 8 ( FY16 FFO FY16 profit on disposal Recurring FFO per share: Pre tax Post tax 50 NewRiver REIT plc Annual Report and Accounts 2017 Net property income Analysis of net property income (£m) Net property income in year to March 2016 Promote receipts from Bravo JV in FY16 Net acquisitions in FY16 Net acquisitions in FY17 Sheffield transaction Other Net property income in year to March 2017 Group net property income increased by 47% to £80.4 million, from £54.6 million in FY16. This increase was due primarily to £158.4 million of acquisition activity completed in the current year, as well as the full year impact of acquisition activity completed in the year to March 2016. On a proportionally consolidated basis, net property income increased by 33.5% to £89.7 million, from £67.2 million in FY16 with the key driver being the acquisition activity described above. The full year impact of net acquisitions completed in the year to March 2016 added £5.9 million to net property income. Current year net acquisitions added £8.7 million to net property income. In April 2016, we acquired the Broadway Shopping Centre and the Broadway Square Retail Park in Bexleyheath for a total cost of £120.3 million. In June 2016 we completed the acquisition of Cuckoo Bridge Retail Park in Dumfries for £20.2 million and in September 2016 we completed the acquisition of a retail warehouse in Sheffield for £17.9 million. Linked to our acquisition in Sheffield, as well as receiving rent from the date of acquisition we also received a surrender premium from the incumbent occupier. Including rent received and the premium itself, receipts totalled £11.5 million. Administrative expenses Administrative expenses increased by 7.1% during the year, to £13.6 million from £12.7 million in FY16, but importantly our cost ratio reduced to 15.1% (FY16: 18.5%) demonstrating the benefits of scale to the business. In addition to these administrative costs, we incurred exceptional costs of £1.2 million (March 2016: £0.9 million) linked to our move to the Main Market which completed in August 2016. While the Main Market move costs of £2.1 million are significant, we are confident that the benefits of access to a wider pool of capital and improved liquidity in our shares will outweigh this cost over the longer term. We qualified for the FTSE 250, All‑Share and EPRA indices in December 2016, and have already welcomed a number of new shareholders to our share register as a consequence. 67.2 (4.3) 5.9 8.7 11.5 0.7 89.7 Net financing costs In FY17, net financing costs increased by 10.3% to £17.1 million from £15.5 million in FY16. Over the same period, our property portfolio has increased by 16.5% to £1,130.6 million, which is significantly more than the increase in finance costs. This differential is caused by our growing scale and the reduction in our cost of debt from 3.7% to 3.5% due to refinancing activity completed in the year, which is explained in the ‘Net debt & financing’ section of this Review. Profit on disposal of investment properties During the year ended 31 March 2017 we completed a modest level of property disposals compared to the prior year, reflecting the slowdown in the investment market following the EU Referendum in June 2016. The proceeds of our disposals were £10.7 million at NewRiver share, and these disposals were completed at a premium to book value of £0.3 million. This level of activity compares to £48.2 million of disposals completed in the year to March 2016, at a premium to book value of £8.3 million. Profitable capital recycling is a key aspect of our business model, and we remain committed to recycling mature assets, assets where our estimates of forward looking returns are below acceptable levels and assets where we believe that the risk profile has changed. Taxation As a REIT, the Company is not exposed to tax on qualifying UK property rental income and gains arising from disposal of exempt property assets. In the year ended March 2017, we incurred a corporation tax charge of £1.2 million, compared to a £0.1 million charge incurred in the year to March 2016. The majority of the charge incurred relates to income received from the Mantle portfolio of pubs, which we purchased from Punch Taverns in August 2015. The occupational agreement for some of these pubs is on a ‘managed’ basis, which means that we receive a profit from the pubs rather than just a rental income. NewRiver REIT plc Annual Report and Accounts 2017 51 STRATEGIC REPORT FINANCIAL REVIEW CONTINUED Our growing dividend At NewRiver, we are proud of our track record of delivering a growing ordinary dividend to our shareholders, and we are committed to maintaining this discipline in the future. Our dividend policy is driven by two key objectives: • Growing cash FFO and FFO per share so that we can continue to pay a growing and fully covered dividend • The REIT requirement to pay out at least 90% of recurring cash profits We are committed to a fully covered dividend, and this is one of our four key Financial Policies. Our Financial Policies are explained in the ‘Net debt & financing’ section of this Review. BALANCE SHEET Properties at valuation Investment in joint ventures Other non‑current assets Cash Other current assets Total assets Other current liabilities Debt Other non‑current liabilities Total liabilities IFRS net assets EPRA adjustments EPRA net assets EPRA NAV per share LTV On 16 May 2017 we also announced our ordinary dividend for the first quarter of FY18 of 5.25 pence, an increase of 5.0% from the 5.00 pence paid in the first quarter of FY17. The ordinary dividend will be paid on 4 August 2017 to shareholders on the register at close of business on 16 June 2017. The ex‑dividend date will be 15 June 2017. The quarterly dividend will be payable as a REIT Property Income Distribution (PID). Balance sheet EPRA net assets include a number of adjustments to the IFRS reported net assets and both measures are presented above on a proportionally consolidated basis. Net assets At 31 March 2017, IFRS net assets decreased by 0.8% to £684.5 million, from £689.9 million at 52 NewRiver REIT plc Annual Report and Accounts 2017 In FY17, we increased our ordinary dividend by 8.1% to 20.0 pence, from 18.5 pence in FY16. Further to this, on 16 May 2017 we announced an additional 3.0 pence special dividend linked to the retail warehouse acquisition in Sheffield which we completed in September 2016. We acquired the Sheffield asset for £17.9 million, and during the year we received a surrender premium and rent from the incumbent occupier totalling £11.5 million, the majority of which we will pay to our shareholders as a special dividend. The special dividend will be paid on 4 August 2017 to shareholders on the register at close of business on 16 June 2017. The ex‑dividend date will be 15 June 2017. The dividend will be payable as a REIT Property Income Distribution (PID). Group £’000 995,928 71,763 351 45,956 5,999 1,119,997 (30,089) (403,079) (2,291) (435,459) 684,538 8,540 693,078 As at 31 March 2017 Joint ventures £’000 134,640 (71,763) – 3,618 191 66,686 (2,408) (64,278) – (66,686) – – – Proportionally consolidated £’000 1,130,568 – 351 49,574 6,190 1,186,683 (32,497) (467,357) (2,291) (502,145) 684,538 8,540 693,078 292p 37% As at 31 March 2016 Proportionally consolidated £’000 973,269 – 551 117,500 9,279 1,100,599 (28,103) (379,179) (3,450) (410,732) 689,867 7,880 697,747 295p 27% 31 March 2016. This decrease is after absorbing purchase costs on £158.4 million of acquisitions, one off Main Market move costs and a 0.6% reduction in capital values. At 30 September 2016 we reported IFRS net assets of £674.6 million, and so in the second half of the financial year we saw an increase in net assets, driven by a capital return across our portfolio of 0.5%. EPRA net assets (‘EPRA NAV’) is calculated by adjusting IFRS net assets to reflect the potential impact of dilutive ordinary shares, and to remove the fair value of any derivatives held on the balance sheet. These adjustments are made with the aim of improving comparability with other European real estate companies. EPRA NAV per share decreased by 1.0% to 292 pence per share, from 295 pence per share at 31 March 2016. Net debt & financing Net debt Analysis of movement in net debt (£m) Net debt at 31 March 2016 Net cash inflow from operations Purchase of investment properties Disposal of investment properties Development and other capital expenditure Dividends paid Other Net debt at 31 March 2017 261.7 (60.0) 162.2 (11.3) 17.3 46.0 2.0 417.9 Net debt increased by £156.2 million in the period predominantly due to £162.2 million of acquisitions (including purchase costs). This included our largest acquisition to date in Bexleyheath where we purchased a retail park and shopping centre for £120.3 million. Net cash inflow from operations was £60.0 million, £1.8 million in excess of FFO and demonstrating the highly cash generative nature of our business and our efficient working capital management. We paid £46.0 million of dividends to our shareholders, being 19.75 pence on a per share basis. We completed £11.3 million of disposals in the year on terms 7% above valuation, including £5.2 million of disposals across our pub portfolio and the disposal of two assets from our Ramsay retail warehouse portfolio, totalling £3.4 million. We invested £17.3 million into our portfolio, either through active asset management initiatives or on our risk‑controlled developments. During the year we spent £6.7 million on our pub portfolio, principally on the construction of eight convenience stores for the Co‑operative, £1.3 million on asset enhancement works on the Piazza in Paisley, £1.2 million at The Forum in Wallsend (including a drive through unit for Burger King) and £0.8 million at Clough Road Retail Park in Hull where we sub‑divided and re‑let the former PC World unit and constructed a Costa coffee pod in the car park. Financial Policies Net debt Principal value of gross debt Weighted average interest rate of drawn debt Weighted average debt maturity of drawn debt Loan to value Interest cover Dividend cover1 Balance sheet gearing 1. FY17 Dividend cover includes the special dividend of 3.0 pence per share Financial Policies Proportionally consolidated 31 March 2017 31 March 2016 £261.7m £382.6m 3.7% 3.5 yrs 27% 4.3x 144% £417.9m £470.9m 3.5% 2.5 yrs 37% 4.5x 108% <50% >2.0x >100% Financial Policies Group <100% 31 March 2017 31 March 2016 29% 52% NewRiver REIT plc Annual Report and Accounts 2017 53 STRATEGIC REPORT Our weighted average debt maturity is deliberately low at 2.5 years, and in February 2017 we appointed Rothschild & Co as our independent debt advisor to assist Management in completing a balance sheet refinancing exercise. Unhindered by legacy debt issues and with a low debt maturity we are well placed to complete this exercise in a cost‑efficient manner, maximising the benefit to our shareholders. Our strategy is to refinance almost all of our existing secured facilities with a range of unsecured facilities, significantly extending our weighted average debt maturity and reducing our cost of debt. Balance sheet scale and a strong interest cover are important factors in our ability to achieve this objective and we believe that our conservative Financial Policies leave us well placed. Summary We have built a highly cash generative and profitable business that has once again delivered a fully covered and growing cash dividend to our shareholders. Looking ahead, with the positive feedback we have already received at this early stage of our refinancing exercise, and with our ongoing active asset management and risk‑controlled development initiatives, we feel confident in our ability to continue to deliver a fully covered and growing dividend to our shareholders. Mark Davies Chief Financial Officer 15 May 2017 FINANCIAL REVIEW CONTINUED Our conservative Financial Policies were put in place in consultation with shareholders and form a key component of our financial risk management strategy. • Our Loan to Value was 37% at 31 March 2017, increased from 27% at 31 March 2016 due to the £158.4 million of acquisitions made in the period. Our balance sheet gearing increased to 52% from 29% in the year, again due to acquisitions completed. Both of these measures are significantly below our stated upper limits, but we are comfortable at these levels and do not intent to increase our Loan to Value or balance sheet gearing in the near term. • Our interest cover was 4.5x at 31 March 2017, increased from 4.3x in March 2016 and significantly ahead of our financing policy which requires a minimum cover of 2.0x. • Our dividend cover, calculated with reference to FFO per share and including both ordinary and special dividends, was 108% at 31 March 2017, in line with our policy of at least 100% dividend cover. Financing We attribute significant value to the strength of the relationships we enjoy with our lenders, and during FY17 we continued to build on our existing strong relationships with Barclays, HSBC, Santander, Lloyds and AIG, as well as establishing a new relationship with DekaBank. The DekaBank facility formed part of our largest acquisition to date in Bexleyheath where we purchased a retail park and shopping centre for £120.3 million in April 2016. This acquisition was part funded by a new £49 million facility with DekaBank, at an all in cost of 2.2%. In July 2016 we signed an improved £85.3 million debt facility with AIG on our pub and convenience store portfolio. Under the terms of the new facility, the bank margin was reduced by 30% and the loan maturity was extended from 2018 to 2021. Following this refinancing activity, our weighted average interest rate reduced to 3.5%, from 3.7% at March 2016. 54 NewRiver REIT plc Annual Report and Accounts 2017 RISK MANAGEMENT Risk Management Report Risk Appetite The Group controls its risk and ensures that all developments and investments are undertaken in a risk controlled environment with evaluations being undertaken before, during and after to ensure that the risks are understood, managed and evaluated. Risk Reporting Process Asset Manager Executive Committee Audit Committee Board R i s k O v e r s ig ht The register is maintained by the Company Secretary in consultation with the asset managers and development team within the Group and is reviewed at each Audit Committee meeting. The register is run on a traffic lights system with: • Red being high risk both in terms of impact and likelihood; • Amber being medium risk with high impact but low likelihood; • Yellow being low risk with low impact but high likelihood; and • Green being low risk in terms of both impact and likelihood. The Board oversees the Group’s risk management and internal controls. It determines the Group’s risk appetite. The Audit Committee monitors the effectiveness of the Group’s risk management and internal controls systems. The Executive Committee is responsible for risk management on a day‑to‑day basis and monitors strategic and other risks. It delegates accountability for risk management to the asset managers and monitors their performance. The Asset Manager is responsible for risk within their portfolio of assets and ensures that they are within the risk appetite set by the Board. Regular reviews are undertaken of the assets which include monitoring risk levels. A risk and internal controls assessment register has been produced covering the following areas: • General Commercial • Financial • Compliance • Asset Management, including shopping centres, retail warehouses and pubs • Development, including health & safety NewRiver REIT plc Annual Report and Accounts 2017 55 STRATEGIC REPORT RISK MANAGEMENT CONTINUED Principal Risks The current principal risks facing the Company are described in the table below. The risks have the potential to affect the business of the Group should they occur. Risk Risk Assessment Mitigation General Commercial Economic recession due to uncertainty from Brexit and world events This is a red risk, both in terms of impact and likelihood Macro‑economic and property market reviews are considered at each Board meeting and ongoing updates are evaluated by the Executive Committee with the view to limit the impact such a recession might have on the Group How it links to our strategic priorities 1 2 3 4 5 Future Government policy which adversely affects the Company’s ability to manage its assets effectively This is a red risk, both in terms of impact and likelihood The Executive Committee considers regular updates from its external advisers and the Company is a member of various industry bodies, with representatives on advisory panels 1 2 3 4 5 Corporate Strategy and Performance Failure to communicate sufficiently and effectively with investors, leading to a depressed share price and demand for equity This is an amber risk, with high impact but low likelihood Growth in online retail spend could be perceived as a threat to traditional bricks and mortar retailers This is an amber risk, with high impact but low likelihood There is a full programme of investor meetings throughout the year as well as specific rounds of meetings post half and full‑year results The management team are embracing the digital age as part of the strategy for the shopping centres, working with online retailers such as Amazon to offer “click and collect” lockers, as well as our traditional retailers to offer click and collect facilities. This helps drive footfall to the centres. Management also commissioned research on the future of the retail sector. It found that the 55+ age bracket is set to account for 57.5% of all store and click and collect sales growth in the next ten years. The same age bracket also shop more frequently and prefer the convenience and accessibility of retails parks and convenience led shopping centres, all of which are included within our portfolio. In addition, 48% of NewRiver’s 150m annual footfall are shoppers aged 55+ Financial Breach of debt covenants could trigger loan defaults and repayment of facilities putting pressure on surplus cash resources This is an amber risk, with high impact but low likelihood Management actively engages with its key lenders, ensuring transparency when it comes to monitoring the assets secured by debt. The team actively monitor the debt covenants and a debt analysis is presented at each Board meeting 4 2 5 56 NewRiver REIT plc Annual Report and Accounts 2017 Risk Risk Assessment Mitigation Financial continued Ensuring that there is adequate working capital for capital expenditure, development projects and acquisitions This is an amber risk, with high impact but low likelihood Management actively engages with its key lenders, ensuring transparency when it comes to the asset management and development of assets and what funding is required for these. A weekly working capital and cash flow analysis is completed by the finance team and circulated to management to assist with this. Start times of development projects are staggered to ensure that there is no over demand on resources at any one time in the year How it links to our strategic priorities 1 2 3 5 Compliance Breach of any of the regulations governing the business of the Group, such as listing rules, UK Corporate Governance Code and The Pubs Code Asset Management Instability and subdued economic activity could lead to reductions in disposable income, impacting demand for retailer goods and ultimately leading to business failure and administrations Failure in performance by individual assets against their business plans Development Poor control of development projects could lead to inadequate returns on investment Over‑exposure to developments could put pressure on cash flow and debt financing This is an amber risk, with high impact but low likelihood The Company and its advisers monitor any changes to the relevant legislations that affect the Group’s business and how these changes may affect it. Any breaches would be resolved accordingly and reported to the Board n/a This is a green risk, with both low impact and low likelihood Management monitor rent arrears on a weekly basis and regularly monitor the credit status of retailers. We apply a strategy to increase weighted average lease length to secure future income stream and to limit exposure to voids. Retailer diversification is high, with no one retailer making up more than 2.6% of total rental income 2 4 This is an amber risk, with high impact but low likelihood Business plans for each asset are regularly reviewed by their asset manager and updated twice yearly. These revised business plans are then reviewed by the Executive Committee This is an amber risk with high impact but low likelihood of happening This is an amber risk, with high impact but low likelihood of happening The Group applies a risk‑controlled development strategy through negotiating long‑dated pre‑lets (typically at least 70% of a development has to be pre‑let prior to commitment) and tight cost control help to de‑risk our developments Each development project is reviewed and approved by the Executive Committee following detailed due diligence modelling and market research 2 3 5 Key 1 2 3 Disciplined stock selection Active asset management 4 5 Risk‑controlled development Profitable capital recycling Maximise benefits of scale/Conservative balance sheet NewRiver REIT plc Annual Report and Accounts 2017 57 STRATEGIC REPORT SUSTAINABILITY REVIEW Our people Corporate Culture With total assets under management of £1.3 billion, the Company has a relatively lean yet highly effective number of employees with a total headcount of 52. Led by the Board, since the Company’s inception in 2009, NewRiver has a prided itself on its strong entrepreneurial and inclusive culture that fosters collaboration, transparency and diligence. The team includes a range of skill‑sets and expertise across management, property, development, finance, corporate, FP&A, marketing and support teams all working towards creating maximum value, achieving our KPIs and delivering results. Core to the success of this is the unique collegiate culture of the business. Ahead of the Company’s move to the Main Market, we undertook a light‑touch brand refresh, evolving to become NewRiver REIT plc from NewRiver Retail Limited. Our Stakeholders During the brand refresh process we defined who the Company’s core stakeholders are, the six identified stakeholders are: the NewRiver team; our investors, our advisers/consultants who help us achieve our KPIs; our retailers; our customers; and the local authorities of the towns we are invested in. At the heart of this group are the people within the NewRiver team. At NewRiver, we have a high satisfaction and retention rate, allowing us to attract and retain talent. Defining our Core Values This re‑branding process included internal and external interviews to understand how the Company is perceived by some of these stakeholders and the outcomes clearly identified the strength of the Company’s team culture, ethos and focused expertise. From this exercise we were able to define the core values of the business – operating as one team, deploying the various skill‑sets from across the business in a collaborative, supportive and dynamic way alongside our valued partners and stakeholders. In this way, we are reputed for our high standards and our detail‑focused, high quality outputs underpinning our drive to deliver beyond expectations. We are brave and ambitious in our pursuits to achieve our clear objectives; and we are smart and trusted in our execution of driving the business forward. Beyond expectations Brave L o c a l Authorities R etailers I n v estors One NewRiver Team A d visers/Co n s u lta nts Consum e r s Trusted Smart Gender split in the business Male Female Total Employees 16 20 36 Senior management 11 3 14 Executive directors 3 0 3 Total 30 23 53 58 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver ESG Story Creating Vibrant Environments NewRiver is invested in over 400 local towns and communities up and down the UK. As a significant stakeholder in these localities, we have an important role and responsibility to our convenience‑led and community‑focused portfolio to help make them thriving retail and leisure locations. As part of our commitment to creating vibrant and sustainable environments, NewRiver appointed Cushman & Wakefield to help develop a comprehensive Environmental & Social Governance (ESG) programme to ensure the business is conducting activities that enhance NewRiver’s reputation, provides social benefit, drive cost efficiency and increase the long‑term value of NewRiver’s business. Since appointing Cushman & Wakefield in 2015, NewRiver has developed a comprehensive Environmental & Social Governance (ESG) strategy for the business and is undertaking a number of initiates and measures within this. (5) Customers Inspire, appeal and retain (2) Investors Maximising performance and controlling risk (1) Our people Empower our employees (4) Local authorities & communities A catalyst for positive change (3) Retailers Manage assets efficiently responding to occupier needs NewRiver’s ESG Strategy: Creating Vibrant Environments The NewRiver portfolio is convenience‑led and community‑focused and the vision for our ESG strategy reflects NewRiver’s customer‑first approach, managing our assets as though we ourselves are retailers and customers. We focus on building partnerships with all our key stakeholders, including our investors, retailers, consumers and local authorities to ensure our goals and aspirations are aligned to deliver mutual objectives. We have identified five key priorities that strengthen the core offering of our business that link directly to our key stakeholders: Within this strategy are a number of targets to measure progress and include the following key areas: 1. Employee empowerment 2. Performance and risk control 3. Effective asset management responding to occupier needs 4. Community engagement 5. Customer satisfaction We have made excellent progress on these targets in Year 1, with almost all criteria met. Given NewRiver’s strong performance on our ESG strategy during our first year as a Main‑Market listed company following our move up from the AIM market, the business is committed to setting longer term targets that can be tracked over the coming years and this is one of NewRiver’s key objectives with Cushman & Wakefield for FY18. Key achievements that NewRiver has accomplished in the last year include: Shopping Centre Energy Audits Generating Savings Totalling Half a Million Pounds Cushman & Wakefield have carried out 19 detailed asset energy audits for NewRiver’s largest shopping centres (by area), highlighting a range of energy efficiency and cost reduction opportunities in the areas within NewRiver’s ownership. Implementation is already underway and planned to be carried out throughout FY18. NewRiver REIT plc Annual Report and Accounts 2017 59 STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED Annual energy cost savings £500,000 The audit programme has highlighted over £500,000 in terms of potential annual energy cost savings thus far. Key efficiency measures include: 1. Data collection/management/monitoring; using this to minimise wastage and generate quick savings 2. LED/Lighting & controls upgrades (lighting represents the single biggest energy cost across the portfolio) 3. Replacing HVAC (heating, ventilation and air conditioning) fan motors with a) new Electronically Commutated Motors that sit within the HVAC systems, and/or b) variable speed drives with the aim of providing thermal comfort and high indoor air quality 4. Replacing ageing electric water heaters with new, more efficient models 5. Thermal de‑stratification fans in malls with treated air, a method to ensure temperature equalisation throughout the building 6. Energy sub‑metering 7. Solar PV opportunities In order to deliver economies of scale, additional value measures will be procured and/or implemented across multiple assets where appropriate. Global Real Estate Sustainability Benchmark (GRESB) NewRiver submitted its maiden entry to the GRESB Benchmark in FY17, demonstrating our portfolio level commitment to assessing ESG performance against real estate competitors both in the UK and globally. GRESB offers a consistent framework to collect and compare key ESG indicators and related performance metrics across global real estate and infrastructure portfolios. NewRiver have taken the results and incorporated these into their ESG action plan for FY18. 60 NewRiver REIT plc Annual Report and Accounts 2017 Appointment of Co-operative Power as new Energy Broker The Company carried out a substantive tender for an energy broker and appointed the Co‑operative Power as the Company’s new energy broker in January 2016. The mobilisation of Co‑operative Power has progressed well. Additionally, Co‑operative Power have led on an Automatic Meter Reading roll‑out across all sites/supplies which fall under the P272 legislation. NewRiver have extended this roll‑out to over 50 additional supplies to better track, monitor and report consumption data within their portfolio. Co‑operative Power are currently mobilising a new data platform which will allow all energy data and documentation to be stored in one place with multiple access rights including the managing agent, all centre managers and NewRiver themselves. The benefits of this platform feed into the audit process, day‑to‑day management, regulatory reporting and wider ESG performance. Health & Wellbeing: UK Green Building Council Retail NewRiver is looking to further develop its already comprehensive Health & Wellbeing metrics framework in line with UK Green Building Council Retail framework. At present, NewRiver collect and report on a number of Health & Wellbeing metrics for all of their shopping centres. This includes perceptual metrics such as cleanliness and security, the quality of key facilities, cosmetics of the shopping centre and parking facilities. Shopper Economic Metrics The Company has also advanced data sets relating to economic metrics via their consumer surveys, conducted by CACI to determine and monitor average spend per person, dwell time and frequency of visits. A workshop was carried out with the UKGBC to collate and organise this data into a clear health & wellbeing framework with a plan of action for improvement. Legislation & Risk Mitigation Cushman & Wakefield have been working with NewRiver on a number of legislative risks including the Minimum Energy Efficiency Standards which comes into force in 2018 and requires Energy Performance Certificates to be carried out for a number of NewRiver’s portfolio units. Co‑operative Power and Cushman’s have collated data for Mandatory Greenhouse Gas Reporting, which is reported on the next page. Activation We will raise funds and the charity’s profile through a combination of sporting, educational, family, retailer and community events appropriate to our sector and shopping centre communities as well as activating our PR, design and communications expertise to deliver this. As well as raising funds and profile, charitable programmes can have an important role in driving teamwork and ensuring social responsibility is on the agenda locally. Our FY17 charity of the year was Pancreatic Cancer Research UK, in memory of our greatly respected and successful Development Director François Nairac. François played a huge role in driving forward our 1.9 million sq ft development pipeline which includes the major regeneration of key UK communities creating better social environments, improved amenities, enhanced retail and leisure, more homes and importantly, creating new jobs. We are delighted to say that through various events we have raised £27,000 for Pancreatic Cancer. FY17 Fundraising £27,000 raised for Pancreatic Cancer Research UK Greenhouse Gas Emissions Under the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013, the Company is required to report annual greenhouse gas emissions. The details for the financial year ending 31 March 2017 appear in the table below. Sources of greenhouse gas emissions 2016/17 tCO2e Scope 1 Gas, refrigerants and car fuel Scope 2 Landlord controlled electricity Total footprint Intensity measure Emissions per sq ft 1,432.03 11,799.08 13,231.11 tCO2e/sq ft 0.119 We have used the operational control method to outline our carbon footprint boundary. Occupiers’ usage or emissions are not included as we do not have control over those items. Emissions from vacant space has been included. We have measured emissions based on the GHG Protocol Corporate Accounting Standard (revised edition) and guidance provided by the UK’s Department for Environment, Food and Rural Affairs (DEFRA) on mandatory carbon reporting. The emissions factors and conversions used were from the DEFRA greenhouse gas reporting tool. Giving Back Since NewRiver’s inception, we have always been very charitable and supportive to good causes both local to our assets and on a national level. We recognise that with the Company’s rapid growth we have a big opportunity to leverage our scale and raise funds and increase the profile of charities in a more concerted and strategic manner and this financial year we developed a dedicated Charities Strategy. The annual strategy is two‑fold: 1. Raise funds for a single charitable cause at a corporate and portfolio level with an agreed fundraising target set at the beginning of the year 2. Each NewRiver shopping centre will support a single charity important to the local community they belong to, with a fundraising target set at the beginning of the year. NewRiver REIT plc Annual Report and Accounts 2017 61 STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED Snapshot of the charities we have supported Way of the Roses Our flagship fundraiser saw 24 riders cycle coast to coast on the Way of Roses, beginning at our shopping centre in Morecambe and finishing at our shopping centre in Bridlington. The team, affectionately named Nairac’s Rogue Riders, cycled 170 miles, scaled 3,225 metres and endured torrential rain, multiple flocks of sheep on the move and very tight quads to raise £26,938 for Pancreatic Cancer Research UK. The “home team” which involved many of NewRiver’s partners as well as staff covered the same mileage on static bikes located at NewRiver’s offices. Age Concern: The Ridings Shopping Centre, Wakefield Why it matters: Most people will feel lonely at some point in their lives. Age UK cites this as a deeply personal experience that in many cases will thankfully pass, but for a growing number of people, particularly those in later life, loneliness can define their lives and have a significant impact on their wellbeing. With 30% of the NewRiver shopper base being aged 65+ or over and The Ridings Shopping Centre in Wakefield’s percentage being even higher at 34%, the centre wanted to tackle loneliness amongst older people in Wakefield. What we did: In collaboration with Age UK Wakefield District, the centre hosted a “Find Friends” Afternoon Tea Event for Valentine’s Day providing complementary hot drinks and cakes and hosting bingo and table top games. Age UK Wakefield District had an information stand highlighting their local services and had 63 interactions, with the hope that these people can enjoy some longer‑term benefits from the event. The Wakefield Friendship Centre also distributed flyers about their fortnightly events. The impact it made: Over 120 people aged 55+ attended, one of whom had not been out socially for three years. Age UK connected with 64 new clients. The event secured 3 minutes of coverage on BBC Look North News that evening and received excellent feedback from attendees, retailers and wider shoppers. The centre received several letters from local people praising the event and enquiring about similar events. The event has spurred the centre to work more closely with Age UK Wakefield, planning a series of similar regular events, under the event brand ‘Cuppa Club’, to help older people avoid loneliness. 62 NewRiver REIT plc Annual Report and Accounts 2017 Children’s Rights: The Avenue Shopping Centre, Newton Mearns Why it matters: Mearns Primary School has been recognised as a Right’s Respecting School by UNICEF since 2009–an initiative encouraging schools to place the UN Convention of the Rights of the Child at the heart of its ethos and curriculum. One of the assessment criteria for Mearns Primary this year was measuring how the school promotes children’s rights within the local community so The Avenue partnered with the school to help achieve this, forming the Mearns Global Citizens Committee, led by the pupils and centre management. What we did: Pupils at Mearns Primary School were invited to participate in a competition to create a poster illustrating one children’s right, such as the right to an education or the right to have friends. One winner was selected from each class including the nursery, to create eight posters which were then displayed in the windows or our retailers. Shoppers were then invited to partake in the Children’s Rights Treasure Hunt to find all eight Children’s Rights in the centre. The impact it made: The Principle Teacher was over‑whelmed by the support and profile the campaign achieved, meeting the objective of demonstrating the pupils’ ability to be a Responsible Citizen. With eight retailers partaking as well as 187 children in the treasure hunt, the campaign brought together the various community stakeholders. One Great Day For the past two years NewRiver have taken part in a growing charity campaign called One Great Day – a nationwide shopping centre event that takes place in the summer to raise money for Great Ormond Street Hospital (GOSH). In FY17 NewRiver contributed to the total fundraising sum, with NewRiver Shopping Centres hosting their own “One Great Day” community events as well as the Corporate team not only partaking in but winning the inaugural London One Great Day Race, to be the fastest property team! FY18 Charity of the Year We are delighted to announce that our FY18 NewRiver Charity of the Year is Great Ormond Street Hospital (GOSH), an important medical institute that touches the lives of hundreds of families up and down the UK, including many of the towns we are invested in. The strategic report on pages 1 to 63 has been approved by the Board of directors and signed on its behalf by: David Lockhart Chief Executive Officer 15 May 2017 NewRiver REIT plc Annual Report and Accounts 2017 63 STRATEGIC REPORT BOARD OF DIRECTORS Leading with integrity Paul Roy Non-Executive Chairman David Lockhart Chief Executive Officer Experience Paul Roy has over 40 years’ experience in the banking, brokerage and asset management industries. In 2003, he co-founded NewSmith Capital Partners LLP, an independent investment management company which was acquired by Man Group in 2015. Prior to founding NewSmith, he was Co-President of the Global Markets and Investment Banking division at Merrill Lynch & Co and had responsibility for worldwide Investment Banking, Debt and Equity Markets. Paul joined Merrill Lynch in 1995 when it acquired Smith New Court Plc a leading market making and brokerage firm on the London Stock Exchange where he was Chief Executive Officer. He joined Smith New Court in 1988, having previously been a Senior Partner in the leading stock broking firm Citicorp Scrimgeour Vickers. Between 2007 and 2013, Paul served as Chairman of the British Horseracing Authority responsible for governance and regulation of the sport and is now Chairman of Retraining of Racehorses, racing’s main equine charity. In 2015, he became Chairman of Sky Bet after CVC acquired a majority stake in the company from SKY PLC. He has a Bachelor of Arts degree in Economics (honours) and a Doctor of Laws from the University of Liverpool. Committees • Chairman of the Nomination Committee • Member of the Remuneration Committee Experience David Lockhart is a qualified Solicitor and Chartered Accountant and has over 35 years’ operating experience in the UK real estate market. David is an experienced and successful entrepreneur, having founded several property businesses across the United Kingdom. He practised law in his family law firm until 1981 when he resigned to found Caltrust Limited, a property development company based in Scotland. David served as Executive Chairman of Caltrust Limited until 1987 when the company was acquired by Sheraton Securities International plc, following which he served as managing director of newly formed Sheraton Caltrust plc until 1990. In 1991, David founded Halladale, a business which he ran as CEO. Halladale floated on AIM in 2001 and was acquired by Stockland Corporation in 2007. In 2009, he co-founded NewRiver and has served as its Chief Executive since its IPO that year. Kay Chaldecott Non-Executive Director (Independent) Experience Kay Chaldecott has over 25 years’ experience of developing and managing regional shopping centres throughout the UK from having worked with Capital Shopping Centres Group plc (now Intu Properties plc). Kay was appointed Managing Director of the Shopping Centre business and served as a main Board Director from 2005 to 2011. Since then, Kay has pursued her Non-Executive Director’s career and is a member of the boards of St. Modwen Properties PLC and Lichfields planning and development consultancy, and is a member of the Advisory Board of Next Leadership. Kay is a member of the Royal Institution of Chartered Surveyors and has a breadth of industry knowledge covering the retail development process, retail mix and leasing and shopping centre operations. Committees • Chairman of the Remuneration Committee • Member of the Audit and Nomination Committees 64 64 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Mark Davies Chief Financial Officer Allan Lockhart Property Director Experience Mark Davies is a Chartered Accountant who joined the Company at its inception in 2009. Mark has over 20 years’ experience in Finance, including over 10 years in the UK real estate sector. He started his property finance career with Grant Thornton before joining BDO LLP as an Audit and Corporate Finance Partner and Head of Real Estate. Prior to joining NewRiver, Mark was Chief Financial Officer of Exemplar Properties and Omega Land, a property investment and development company which was owned by Morgan Stanley Real Estate Funds. Mark has experience in many areas of property and Corporate Finance including debt and equity capital markets. Experience Allan Lockhart has over 25 years’ experience in the UK real estate market specialising in the retail sector. He started his career with Strutt & Parker in 1988 advising major property companies and institutions on retail investment and development. Allan was appointed as retail director to the principal trading subsidiary of Halladale (now Stockland) in January 2002 and was responsible for co-ordinating the acquisition of, and implementation of the asset management strategies in respect of, over 20 shopping centres as well as acquiring and completing several profitable retail developments. In 2009, he co-founded NewRiver and has served as Property Director since its IPO that year. Alastair Miller Non-Executive Director (Independent) Chris Taylor Senior Independent Non-Executive Director Experience Alastair Miller was Chief Financial Officer of New Look Group plc from 2000 until 2014 and during that period had a range of other responsibilities in addition to finance including property, systems, company secretariat and investor relations. He was one of the MBO team who helped take the company private in 2004 and led a number of subsequent refinancings. Previously, he was the Group Finance Director at RAC for 11 years, having joined from Price Waterhouse in 1988 where he was a management consultant. Prior to that, he was Finance Director of a company within the BTR Group. Alastair qualified as a Chartered Accountant with Deloitte Haskins and Sells (now part of PricewaterhouseCoopers LLP) and holds a BSc in Economics. Committees • Chairman of the Audit Committee • Member of the Remuneration and Nomination Committees Experience Chris Taylor was a Non-Executive Director during the financial year and also acted as the Senior Independent Director. Chris stepped down from the Board on 9 April 2017 and a search to replace him is ongoing. Committees • Former Chairman of the Audit Committee • Former Member of the Remuneration and Nomination Committees Matthew Jones Company Secretary Matthew Jones is a chartered secretary with over 25 years’ experience in the profession and has been company secretary to both Main Market and AIM listed companies, as well as private group companies, He has worked across a number of sectors, including finance, private equity, consumer goods and real estate. Matthew is a Fellow of the ICSA: The Governance Institute. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 65 65 GOVERNANCE CORPORATE GOVERNANCE REPORT Corporate Governance Report “NewRiver is an early adopter of the UK Corporate Governance Code published in April 2016. The Board is committed to high standards of corporate governance.” As part of its commitment to high standards of governance, NewRiver maintains a regular, open dialogue with shareholders. This dialogue was instrumental in the refinement of the Company’s remuneration policy, which is included in this Annual Report for the first time. The Board consulted with investors representing almost two-thirds of the Company’s issued share capital before recommending the policy to shareholders. The Board looks forward to building on its progress in creating a governance framework that recognises and respects the interests of NewRiver’s stakeholders in a fair and balanced manner. The Board is grateful to those stakeholders for their contributions to this process to date and looks forward to continuing engagement in the future. Paul Roy Chairman 15 May 2017 Welcome to NewRiver’s Governance Report for the year ending 31 March 2017. This describes how the Board and its Committees worked on behalf of shareholders and other stakeholders, driving the culture and discipline necessary for the Company to achieve its goals. NewRiver’s good financial results for the year in part reflect successful strategic leadership from the Board in the period to date and I would like to thank the Directors for their dedication and hard work, which was essential to this achievement. Since NewRiver’s inception, the Board has regarded high standards of governance as a fundamental pre-condition for the Company’s success. I am pleased to report that the Company is an early adopter of the UK Corporate Governance Code published in April 2016 and that most of the requirements placed upon FTSE 350 companies under the Code had already been met by NewRiver before it decided to apply for a main listing, and that all Code requirements were met by the time of its joining the Main Market last August. The Company tested the effectiveness of the Board with an independent evaluation in February 2017, the results of which are described on page 70. The evaluation report was encouraging and provided positive feedback with regard to the strategy process, Board relationships, quality of external inputs and other key items. Areas for improvement, as shown on page 70, have been noted and will be addressed in the coming year. 66 66 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Board and Committee Structure: Board Responsible for leading & controlling the Group and has overall authority for the management and conduct of the Group’s business, strategy and development Audit Committee Reviews and monitors the Group’s risk management processes Monitors the integrity of the half‑year and annual financial statements before submission to the Board Monitors the effectiveness of the audit process Remuneration Committee Implements the remuneration policy of the Group which is to ensure that Directors and senior management are rewarded in a way that attracts, retains and motivates them and aligns the interests of both shareholders and management Nominations Committee Reviews the succession planning requirements of the Group and operates a formal, rigorous and transparent procedure for the appointment of new Directors to the Board Executive Committee To assist the Chief Executive with the development & implementation of the Group strategy, the management of the business and the discharge of its responsibilities delegated by the Board Property Board To assist the Property Director with the management of the Group’s portfolio and development pipeline and to discharge the responsibilities delegated to him by the Executive Committee Operations Committee To assist with the day to day running of the office; administration of its functions (including IT) in accordance with the responsibilities delegated to it by the Executive Committee NewRiver REIT plc Annual Report and Accounts 2017 67 GOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED Board Membership Details of the Directors, including the skills and experience that they bring to the Board, are on pages 64 to 65. During the year, the Board was comprised of a Non-Executive Chairman, three Executive Directors and three Non-Executive Directors. In accordance with the UK Corporate Governance Code, each of the Non-Executive Directors was considered independent during the year. The Chairman was independent on appointment and the Board still consider him to be independent. Responsibilities of the Board The Board is responsible for leading and controlling the Group and has overall authority for the management and conduct of the Group’s business, strategy and development. The Board is also responsible for ensuring the maintenance of a sound system of internal controls and risk management (including financial, operational and compliance controls) and for reviewing the overall effectiveness of systems in place as well as for the approval of any changes to the capital, corporate and/or management structure of the Group. There is a clear division of responsibility between the Chairman, who is responsible for the leadership of the Board, and the Chief Executive, who is responsible for managing and leading the business. A summary of the Directors’ responsibilities is shown below: Chairman: Paul Roy’s role is to lead the Board and ensure that it operates effectively. His responsibilities include: • setting the agenda, style and tone of the Board meetings to ensure that all matters are given due consideration; • maintaining a culture of openness, debate and constructive challenge in the Board room; • ensuring the Board’s effectiveness and ensuring it receives timely information; • ensuring effective communication with shareholders; • ensuring a new Director receives a full, formal and tailored induction on joining the Board; and • reviewing and agreeing training and development for the Board. Chief Executive: Property Director: Chief Financial Officer: Senior Independent Non- Executive Director: Non- Executive Directors: Company Secretary: David Lockhart’s responsibilities include: • managing the business of the Group; • recommending the Group’s strategy to the Board; and • implementing the strategy agreed by the Board. Allan Lockhart’s responsibilities include: the management of the Group’s portfolio & development pipeline; and • • chairing the Property Board. Mark Davies’ responsibilities include: implementing the financial strategy, including balance sheet capitalisation; • • overseeing the financial reporting and internal controls; and • overseeing investor relations. Chris Taylor’s responsibilities included: • acting as a sounding board for the Chairman; • evaluating the Chairman’s performance as part of the Board’s evaluation process; • serving as an intermediary for the other Directors when necessary; and • being available to shareholders should the occasion occur when there was a need to convey concern to the Board other than through the Chairman or the Chief Executive. Kay Chaldecott and Alastair Miller bring independent judgement, knowledge and varied commercial experience to the meetings and in their oversight of the Group’s strategy. Kay and Alastair are Chairman of the Remuneration and Audit Committees respectively. Matthew Jones’ responsibilities involve: • being Secretary to the Board and its Committees; • under the direction of the Chairman, being responsible for maintaining good information flows within the Board and its Committees; • under the direction of the Chairman and CEO, developing Board and Committee agendas, and collating and distributing papers; • advising the Board on all governance matters; • ensuring compliance with all relevant statutory and regulatory requirements; and • supporting the Executive Committee. 68 68 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Attendance All Directors are expected to attend Board and Committee meetings of which they are a member. During the year, there were five scheduled Board meetings, including the strategy meeting, and four additional Board meetings relating specifically to the Company’s move from AIM to the Main Market of the London Stock Exchange and the change in the Group’s domicile from Guernsey to the UK. Each of the Directors has committed to attend all scheduled Board and Committee meetings and would not do so only in exceptional circumstances. Similarly, they would make every effort to attend ad hoc meetings either in person or by telephone when convened. If a Director cannot attend a meeting, they are provided with the papers in advance of the Meeting as usual, and they have the opportunity to discuss them with the Chairman or Chief Executive and provide their comments. Attendance at the Committee meetings is shown in the respective Committee reports and attendance at the Board meetings is shown below: Paul Roy David Lockhart1 Allan Lockhart Mark Davies Kay Chaldecott2 Chris Taylor3 Alastair Miller Scheduled (7) Additional (4) 7 6 7 7 7 5 7 4 4 4 4 2 2 4 1. Unable to attend one Board meeting due to illness 2. Unable to attend two of the additional meetings due to conflict with other scheduled business meetings 3. Unable to attend one scheduled board meeting and two additional board meetings due to conflicts with other scheduled business meetings. In addition, Chris Taylor did not attend the Board strategy meeting as this was held just before he stood down as a Non-Executive Director of the Company. Business of the Board during 2017 Routine Business Q1 Q2 Q3 Q4 • approval of the 2016 Annual Report • approval of the 2017 budget • quarterly review of the Group’s portfolio Quarterly meeting moved to the beginning of third quarter due to the move to the Main Market investor roadshow review 2 meetings held in this quarter • quarterly finance update • quarterly review of the Group’s portfolio • • approval to offer a SCRIP dividend scheme to shareholders at the 2017 AGM 2 meetings held in this quarter plus 1 strategy meeting • quarterly finance update • quarterly review of the Group’s portfolio • presentation from GlobalData on the future prospects for the retail market • presentation from Prism Boardroom on the external Board evaluation • refresher training on the Market Abuse Regulations and update on corporate governance regulations • strategy meeting held NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 69 69 GOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED Additional Business Q1 • approval to move listing from AIM to the Main Market and to change the Group’s domicile from Guernsey to the UK Q2 • • training given on Market Abuse Regulations and Directors’ Responsibilities as a Main Market company four additional meetings held to review the process of moving from AIM to the Main Market and for moving domicile from Guernsey to the UK • Court and General Meetings to obtain shareholder approval for the proposals • approval to acquire Sheffield Retail Park Board Evaluation Process In light of the move to the Main Market, the Nomination Committee also reviewed the Board evaluation process. As an AIM-listed company, NewRiver Retail’s Board did not have to undergo regular evaluations. It nonetheless undertook such evaluations annually by means of an internal questionnaire. For NewRiver REIT, as a Main Market company and constituent of the FTSE250 index, such evaluations are required under the UK Corporate Governance Code, with externally led reviews required every three years. The Nomination Committee decided to appoint an external evaluator to undertake its first Board evaluation. This decision was designed to establish firm foundations for future evaluations and thus to ensure continuing high standards of governance for the Company. The Nomination Committee delegated authority to the Chairman and the Company Secretary to review external evaluators and to recommend one for approval. They selected Prism Boardroom which had not undertaken any work for the Company before and was therefore deemed independent. Scope, key findings and recommendations The scope of the evaluation was discussed and agreed between the evaluator, the Chairman and the Company Secretary in the context of a three-year evaluation plan. One-to-one discussions with each member of the Board and the Company Secretary were conducted in February with Prism Boardroom reporting its findings to the Board at its March meeting. Scope Key Board relationships Director commitment Board balance Leadership Process used to develop and deliver the Company’s strategy Effectiveness of Board and Committee meetings and what could be done to improve their effectiveness Findings Participants were unanimous that the Board was well balanced, committed and cohesive team, with respected leadership Recommendations Continue as is The process for delivering the strategy could be enhanced by focusing on what resource might be necessary to deliver it over the long-term Executive management to consider the resource within the business required over a five year + period • All meetings were run efficiently, with good quality discussion in which everyone felt able to give their views and opinions • There were a number of house-keeping points identified which could enhance the effective management of the meetings • The right mix of skills and experience from the members was available on each Committee • The Nomination Committee could benefit from a greater degree of formality around its operation The Board is reviewing the report and its recommendations. Actions taken by the Board as a result of this review will be reported in next year’s report. Induction of New Directors No new Director was appointed to the Board during the year. However, when a new Director does join, the Chairman and Company Secretary will implement an induction process which will ensure that the new Director is fully briefed about the Company and its operations; meets with its senior management; visits various assets and be briefed on their legal and regulatory obligations as a Director of a public limited company. Directors’ Training During the year, the Directors’ were trained by the Company’s advisers on their obligations as Directors’ of a Main Market listed company and also on the requirements of the Market Abuse Regulations which came into force during the period. Corporate Culture Details of the Company’s Corporate Culture can be found on page 58 70 70 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Shareholder Engagement The Chief Executive, Chief Financial Officer and the Head of Investor Relations are the Company’s principle spokesmen with investors, fund managers, analysts and the press. The Property Director attends investor meetings and talks to the press as and when required. The Board is committed to providing investors with regular announcements of significant events affecting the Group. The Company organises a twice yearly investor roadshow after the half-year and full-year results whereby it meets its major institutional investors. In addition, one-on-one and group meetings are held throughout the year as required. During the year, the Company met with 204 investors during 168 meetings – as per the chart below: April 2016 May June July August September Investor roadshow in London 2016 full-year results Equity sales presentations Investor roadshow in London & Brussels Equity sales presentation Investor roadshows in Amsterdam, Edinburgh, Zurich & Paris Q1 2017 Company update Investor roadshow in London Investor asset tour JP Morgan Small/Mid Cap Conference, London Investor roadshow in London October November December January 2017 February March Investor asset tour Investor roadshow in London Peel Hunt Investor Conference, Liverpool 2017 half-year results Equity sales presentations Berenberg European Corporate Conference, Surrey Investor asset tour Investor roadshows in London, Edinburgh & Frankfurt UBS Global Real Estate Conference, London Q3 2017 Company update Investor asset tour Equity sales presentation Equity sales presentation Investor roadshows in Munich & Amsterdam Investor asset tour The Chairman and Senior Independent Non-Executive Director are available to meet with shareholders to discuss governance or any other concerns that they may have and which is not appropriate to discuss through normal channels of communication or where normal channels of communication have failed to resolve the concern. No shareholder has requested such a meeting to date. The Chairman attends the financial results presentations to hear shareholder and analysts queries. In addition, the Board is kept regularly updated of the meetings that the Executive Directors have with shareholders and analysts. The Head of Investor Relations provides the Board with a weekly report updating them of the market for the Company’s shares, what its peers are doing and any reports issued about the sector generally and the Company specifically. Annual General Meeting (“AGM”) The AGM is the annual opportunity for all shareholders to meet with the Directors and to discuss with them the business and its strategy. All Directors are available to meet informally with the shareholders before and after the meeting. The Notice of AGM is posted to all shareholders at least 21 working days before the meeting. Separate resolutions are proposed on all substantive issues and voting is conducted by a poll. The Board believes this method of voting is more democratic than voting via a show of hands since all shares voted at the meeting, including proxy votes submitted in advance of the meeting, are counted. For each resolution, shareholders will have the opportunity to vote for or against a resolution, or to withhold their vote. Following the meeting, the results of votes lodged will be announced to the London Stock Exchange and displayed on the Company’s website. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 71 71 GOVERNANCE AUDIT COMMITTEE REPORT Audit Committee Report For the year ended 31 March 2017 Audit Committee composition and attendance at Meetings Chris Taylor1: Committee Chairman Kay Chaldecott Alastair Miller1 3/3 3/3 3/3 The following were invited to attend the Meetings: Mark Davies – Chief Financial Officer The Group Financial Controller The Head of Finance Representatives of Deloitte, the Company’s auditor Matthew Jones, the Company Secretary, acts as secretary to the Committee. 1. Chris Taylor served as Committee Chairman at all meetings held in the financial year and then stood down as Committee Chairman after its March 2017 meeting, prior to his resignation as a director on 9 April 2017. Alastair Miller was appointed as Committee Chairman in his place. “Robust risk management is an essential element of the rigorous management processes followed by NewRiver. The Audit Committee is committed to monitoring the effectiveness and integrity of these processes which include the accurate preparation of financial statements.” Alastair Miller Committee Chairman Key activities in 2016/17: • Reviewing and monitoring the Group’s risk management processes • Monitoring the integrity of the preparation of half-year and annual financial statements before submission to the Board • Reviewing the FPPP process as part of the move to the Main Market • Meeting with the Property valuers to review their valuation processes Areas of focus for 2017/18: • Consider the best timing to commence an audit tendering process • Review the risk management and internal control processes 72 72 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Dear Shareholders, I am pleased to present my first report on behalf of the Audit Committee having succeeded Chris Taylor who stood down in March of this year. I would like to thank Chris for his invaluable contribution to this committee since becoming Audit Committee Chairman in 2012. The principle role for the Committee is to provide independent review and monitoring of the risk management and control procedures within the Company. The risk management process reviews both external risks as well as internal control risks and ensures that risks are being properly identified, their potential impact on the company measured and then adequately managed and mitigated. Each identified risk is assigned to a specific Director or Directors who and then responsible for monitoring that risk and taking mitigating actions. The Audit Committee is also responsible for reviewing the half year and annual financial statements and the process that is used to produce them. As part of this process the Committee meets with the Company’s auditors, Deloitte, who produce a detailed report covering their audit plans, materiality criteria and any issues identified during the course of their audit together with recommendations for improving accounting processes. There have been no material issues raised. In common with other property companies, asset valuations are a key focus in preparing the financial statements. During the year, independently of the Company’s management, the Committee met in April with the Company’s valuer, Colliers International, to ensure that it was comfortable with the process followed and to ensure their independence. I can confirm that a robust valuation process has been followed. Committee Members & Discharge of Responsibility Each Committee member is independent and has broad commercial experience as a director. Chris Taylor and Kay Chaldecott have provided strong and relevant property experience which has complimented my relevant financial experience thereby ensuring that the Committee has the right balance of skills and experience to properly discharge its responsibilities. As a Chartered Accountant and, until recently, being the Chief Financial Officer of New Look Group, the Board considers that I have significant, recent and relevant financial experience as required by the UK Corporate Governance Code. I consider that the regular discussions and meetings that are held by the Committee, and the challenge that the Committee has with the Company’s management, the auditor and property valuer, together with the quality of the reports and information prepared for the Committee meetings, has enabled the Committee members to discharge their duties and responsibilities. Alastair Miller Committee Chairman 15 May 2017 How the Committee operates The Committee meets at least three times a year but also holds ad-hoc meetings when required. It met three times during the year to discuss the half-year and annual financial statements, risk management reviews and internal control processes. Only members of the Committee are entitled to attend the meetings, however a standing invitation is extended to Mark Davies, CFO; the Head of Finance and representatives of Deloitte LLP (“Deloitte”), the Company’s external auditor. Matthew Jones, as Company Secretary, attends each meeting and acts as secretary to the Committee. Responsibilities of the Committee during the year During the year, the Committee was responsible for: • overseeing the Group’s relationship with Deloitte, including its remuneration; • monitoring the integrity of the half-year and annual financial statements before submission to the Board; • discussing any issues arising from the half-year review and year-end audit of the Group; • reviewing significant financial reporting matters and judgments, with a particular focus on matters of material financial impact on the Group; • reviewing the effectiveness of the Group’s system of internal controls; • reviewing and monitoring the Group’s risk management processes; • conducting an annual review of the need to establish an internal audit function; • monitoring and annually reviewing the auditor’s independence, objectivity and effectiveness of the audit process; and • evaluating the Committee’s own performance, which was undertaken as part of the Board evaluation process referred to on page 70. The Company has not had any interaction with the Financial Reporting Council’s corporate reporting team. The principal matters discussed during the year were as follows: • Valuation of assets. The 2017 year-end balance sheet shows assets under management of £1.3bn. The Committee, independently of management, met with Colliers International at the end of April 2017 to discuss with them the valuation of the assets, to understand the process that was followed and to ensure that a robust and independent valuation had taken place. • Risk management. The Committee reviews the risk register at each meeting and, as part of the process of moving the Company’s listing from AIM to the Main Market, the register’s format was revised to make it easier to highlight the key risks within the business. • Accounting treatment and revenue recognition for the acquisitions of Bexleyheath and Sheffield. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 73 73 GOVERNANCE AUDIT COMMITTEE REPORT CONTINUED • Taxation and REIT compliance: The Committee was aware that, should the Group not comply with the REIT regulations, it could incur tax penalties or ultimately be expelled from the REIT regime which would have a significant effect on the financial statements. The Committee noted the frequency with which compliance with the regulations was reported to the Board and considered the margin by which the Group complied. Based on this and the level of headroom shown in the latest Group forecasts the Committee agreed that no further action was required for the current year. • Audit process. The Committee and the auditor, Deloitte, discussed the resourcing required to audit a FTSE250 company. Deloitte provided additional resource and the audit process commencenced earlier. Risk Management The Board overseas the Group’s risk management and internal controls and determines the Group’s risk appetite. The Audit Committee at each of its meetings monitors the effectiveness of the Group’s risk management and internal controls systems at each Committee meeting. Further details of the Company’s risk management process, together with the principal risks, can be found in the Risk Management report on pages 55 to 57. Details of the Company’s internal controls are below. Internal Control Structure The Group does not have an internal audit team. The need for this is reviewed annually by the Committee, however due to the Group’s size and relative lack of complexity, it is felt that there is no requirement for such a team just yet. However, while there may not be an internal audit team in place, BDO UK LLP, as an independent third party, are engaged to undertake an annual review of the Group’s internal control system to ensure that the Company has sufficient controls in place and they did this during February 2017. The results of the review were encouraging and stated that there was an appropriate system in place to achieve the current financial and operational controls required and to ensure that the Company’s compliance obligations were met. While all of the necessary checks and balances were being done, the documentation confirming this was not always completed in a timely manner and this will be addressed during the current year. In addition, as part of the Company’s move from AIM to the Main Market in August 2016, Deloitte were engaged to undertake a Financial Position and Prospects Procedures review (“the FPPP review”). The FPPP review documented the nature of the Group’s financial position and prospects procedures and the steps taken by the Directors to enable them to make their confirmation, in the prospectus for the move to the Main Market, that they had established procedures which provided a reasonable basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of the Group. The FPPP review was very thorough and took about three months to complete. It covered all functions and processes within the Group, including internal controls, governance 74 74 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 surrounding Board and Committee meetings, IT, forecasting & budgeting and management reporting. Even though the Company was listed on AIM, it had been conducting itself as a Main Market company and the FPPP review concluded that all of the necessary internal controls and procedures were in place and were being followed. External auditor The Committee considers the nature, scope and results of the external auditor’s work and reviews, develops and implements policy on the supply of any non-audit services that are to be provided by the external auditor. It receives and reviews reports from the Group’s auditors relating to the Group’s annual report and accounts and the external audit process. Audit Plan In respect of the audit for the financial year ended 31 March 2017, Deloitte presented their audit plan (prepared in consultation with management) to the Committee. The audit plan took into account key changes in the business, materiality levels, valuation of the portfolio, especially focusing on how the pub element was valued, and the development pipeline. Following discussions with both Deloitte and management, the Committee approved the implementation of the plan. Audit & Non-audit Fees The Company paid £287,000 in audit and audited related fees for the financial year ended 31 March 2017. The Company has a non-audit services policy in place which limits Deloitte to working on the audit or such other matters where their expertise as the Company’s auditor makes them the logical choice for the work. This is to preserve their independence and objectivity. The Company paid £220,000 in non-audit fees to Deloitte for the financial year ended 31 March 2017. The amount paid in non-audit fees is high this year because Deloitte were engaged in undertaking the FPPP review and other reporting accountant work required as part of the process of moving the Company from its AIM listing to its Main Market listing. BDO UK LLP has been engaged to provide tax advice to the Company and to undertake the annual internal control review. Effectiveness and Independence The Chair of the Committee speaks regularly to the audit partner to ascertain if there are any concerns, to discuss the audit reports and to ensure that the auditor has received support and information requested from management. The Committee reviewed the effectiveness of the 2016 external audit process by considering the extent to which the audit plan was met, the degree of challenge involved in the process, the depth of understanding, the review of key accounting policies and audit judgements, and the content of the auditor’s reports to the Committee. It was noted that the audit had been completed to a high standard, however additional resource allocated to the audit would be beneficial to the process. Viability Statement The Committee provides advice to the Board on the Viability Statement which can be found on page 104. The Committee ensured sufficient review was undertaken of the adequacy of the financial arrangements, cash flow forecasts and lender covenant compliance. Accordingly, the Committee recommended to the Board that the statement be approved. Having considered the effectiveness and independence of the auditors in both the audit and non-audit services it provides, the Committee has recommended to the Board that a resolution is proposed at the forthcoming Annual General Meeting to reappoint Deloitte as the Group’s external auditor. Tenure Deloitte LLP has been the Group’s auditor since 2010. David Becker is the audit partner from Deloitte and he was appointed in 2015. Under the regulations, the last audit that he could sign off would be the 2019 audit and he would have to rotate off in 2020. Under The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the audit should be tendered every ten years. No tender has been undertaken since Delloitte’s appointment as auditor. As such, the Committee will give consideration in due course to such a tender, taking into account the complexity and time that such tenders take. Statement of Compliance The Company confirms that is has complied with terms of The Statutory Audit Services for Large Companies Market Investigation (Mandatory User of Competitive Tender Processes an Audit Committee Responsibilities) Order 2014 (“the Order”) throughout the year. In addition to requiring mandatory audit re-tendering at least every ten years for FTSE 350 companies, the Order provides that only the Audit Committee, acting collectively or through its Chair, and for and on behalf of the Board is permitted: • • • • • to the extent permissible in law and regulation, to negotiate and agree the statutory audit fee and the scope of the statutory audit; to initiate and supervise a competitive tender process; to make recommendations to the Directors as to the auditor appointment pursuant to a competitive tended process; to influence the appointment of the audit engagement partner; and to authorise an auditor to provide any non-audit services to the Group, prior to the commencement of those non-audit services. Fair, Balanced and Understandable The Directors are required to confirm that they consider, taken as a whole, that the Annual Report is fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. The Committee has satisfied itself that the controls over the accuracy and consistency of information presented in the Annual Report are robust and has confirmed to the Board that the processes and controls around the preparation of the Annual Report are appropriate allowing the Board to make the “fair, balanced and understandable statement” which is on page 105. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 75 75 GOVERNANCE NOMINATION COMMITTEE REPORT Nomination Committee Report For the year ended 31 March 2017 Nomination Committee composition and attendance at Meetings Paul Roy: Committee chairman 3/3 Kay Chaldecott Alastair Miller Chris Taylor* 3/3 3/3 2/3 * Chris Taylor was not able to make the February 2017 meeting due to another business commitment. David Lockhart, Chief Executive Officer, is invited to attend Meetings. Matthew Jones, Company Secretary, acts as secretary to the Committee. Dear Shareholders, In August 2016, the Company successfully moved its listing from the AIM market of the London Stock Exchange to the Main Market. In preparation for that move, the Committee reviewed the Board composition to ensure that it was fully compliant with the UK Corporate Governance Code and had a majority of independent Non-Executive Directors. In light of the move to the Main Market, the Committee also reviewed its Board evaluation process. As an AIM-listed company, NewRiver Retail’s Board did not have to undergo regular evaluations. It nonetheless undertook such evaluations annually by means of an internal questionnaire. For NewRiver REIT, as a Main Market company and constituent of the FTSE250 index, such evaluations are required under the UK Corporate Governance Code, with externally led reviews required every three years. The Committee decided to appoint an external evaluator to undertake its first Board evaluation. This decision was designed to establish firm foundations for future evaluations and thus to ensure continuing high standards of governance for the Company. Further details of the process and its results are to be found in the Corporate Governance report on page 70. In January 2017, the Company announced that Chris Taylor would stand down as a Non-Executive Director in April 2017. The Company is currently in the process of searching for a suitable candidate to succeed Mr Taylor. The details of this process are to be found on the following page. During the current year, the Committee will continue to focus on succession planning and on implementing the recommendations of the Board evaluation. Paul Roy Committee Chairman 15 May 2017 “Succession planning, both at the Board and senior management levels, will continue to be a key area of focus for the Committee” Paul Roy Committee Chairman Principle Roles: • to review the succession planning requirements for the Group; to ensure that it operates a formal, rigorous and transparent procedure for the appointment of new Directors to the Board; to regularly review the composition of the Board and its various committees (including their chairmanships); and to evaluate the performance of these committees and that of the Board as a whole. • • • Key activities in 2016/17: • review of the Board Evaluation process, in light of joining the Main Market of the London Stock Exchange, and appointment of an external evaluator to lead that process; implementation of the process to appoint a new independent Non-Executive Director; and • • review of the Board’s succession plan. Areas of focus for 2017/18: • appointment of an independent Non-Executive Director; • support the implementation of the recommendations resulting from the Board evaluation process; • continue the focus on succession planning; and • consider the Group’s diversity policy. 76 76 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 How the Committee operates The Committee meets at least twice a year and holds ad-hoc meetings when required. It met three times during the year to discuss succession planning, Board evaluation and the process to be followed in the search for a new Non-Executive Director following the resignation of Chris Taylor. Only members of the Committee are entitled to attend the meetings, with the Company’s Chief Executive Officer, David Lockhart, having a standing invitation to attend. This is so that the Committee can understand the views of executive management when making its deliberations, especially on succession planning. Matthew Jones, Company Secretary, attends each meeting and acts as secretary to the Committee. Activities of the Committee during the year Succession planning The Committee considers succession planning a key part of its remit. It recognises the importance of creating robust succession plans for both the Board and the internal talent so that it can fulfil the Company’s long-term strategy. The Committee acknowledges that the plans should be regularly reviewed to ensure that employees and Board members have sufficient skills and experience to ensure the continuing success and good governance of the Company. The Committee also works with the Executive Directors to nurture a pipeline of talented employees below board level who will be able to serve as the next generation of plc Board directors. As part of the current year’s review of the plans, short, medium and long-term horizons will be considered to ensure that the plans allow for sudden and unforeseen departures, for the orderly replacement of Board members and senior members of staff, and to ensure that sufficient skills and experience remain in the business to ensure that the Company’s strategy and objectives are met going forward. Recruitment of a new Non-Executive Director In January 2017, Chris Taylor advised the Company that he would be resigning as a director and standing down from the Board with effect from April 2017, triggering the process to identify and appoint a suitable successor. The Chairman, CEO and Company Secretary were delegated to meet two executive search firms, both of whom were signatories to the Revised UK Voluntary Code of Conduct for Executive Search Firms. The appointment of Spencer Stuart, which had not undertaken any work for the Company before and was therefore deemed independent, was recommended. The Board approved a detailed brief to be used to compile a short list of candidates. The brief specified that candidates needed a good range of experience that did not necessarily have to come from the property or retail sectors. Spencer Stuart is currently in discussions with proposed candidates with a view to putting five forward for the Board’s consideration. Each member of the Board will have the opportunity to meet with the proposed candidates prior to a final appointment being made. This is designed to ensure the future cohesiveness of the Board following the new appointment. The Company will inform the market as and when an appointment is made. Diversity Policy The Company has developed a culture which recognises the benefits of diversity and has been successful at recruiting key members of its team from a range of different backgrounds. Before the Company became a REIT in 2010, 50% of its Board directors were female and the culture and discrimination policies the Company has adopted since this time have always embraced all aspects of diversity. The Board currently comprises one female non-executive director, Kay Chaldecott. Recognising the benefits of diversity the Company would like to see the female Board representation increase further. When recruiting, the Company has always considered all aspects of diversity during the process. The Company ensures there is a selection of candidates who have a good balance of skills, knowledge and experience. The Company aims to recruit the best candidates on the basis of their merit and ability. Recognising the current ongoing debate around diversity the Company is intending to draft a policy in the future that will give regard to updates to best practice and the recommendations of the Hampton Alexander and McGregor Smith reviews when doing so. Composition of the Board during the year Independent Directors: 3 Executive Directors: 3 Non-executive Chairman (independent): 1 Length of Directors’ tenure Less than three years: 1 Three – Six years: 2 Seven to Eight years: 4 Directors’ core area of expertise Real Estate experience: 4 Finance experience in the line management or audit capacity: 2 Banking/City experience: 1 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 77 77 GOVERNANCE REMUNERATION COMMITTEE REPORT Remuneration Committee Report For the year ended 31 March 2017 This report consists of three sections: a) Annual statement; b) The Remuneration Policy which, subject to approval at the AGM to be held on 14 July 2017, would be in force for a period of three years from 1 April 2017; and p.79 p.81 c) The implementation report which is based p.92 on the informal remuneration policy that the Company followed in the past and details the remuneration for 2017, including the single figure remuneration tables. NewRiver’s remuneration structure Fixed remuneration Variable remuneration Salary Pension Benefits Bonus PSP Total remuneration “It has been a busy year for the Committee, introducing new PSP performance conditions; overseeing revised Executive Director service contracts; and introducing a formal Remuneration Policy including the development of a new annual bonus plan.” Kay Chaldecott Committee Chairman Areas of focus for 2017/18: • Monitoring the bonus plan objectives • Monitoring the performance conditions for the performance share plan Remuneration Committee operation, composition and attendance at Meetings The Committee meets at least three times a year, together with ad-hoc meetings when required. It met five times during the year and attendance was as follows: The Committee’s responsibilities during the year were: • to consider the objectives, annual pay and targets for the Executive Directors; • review and agree changes to the allocations basis for the staff bonus pool; • • review and determine the implementation of the Group’s share incentive schemes and the granting and vesting of options; to agree the changes in service contracts for the Executive Directors; to agree the new PSP performance conditions; and to agree and implement the remuneration policy • • Kay Chaldecott: Committee Chairman Paul Roy Alastair Miller Chris Taylor 5/5 5/5 5/5 3/5 * Chris Taylor was not able to make two meetings due to other work commitments. The following were invited to attend the Meetings: • David Lockhart – Chief Executive Officer • Representative of h2glenfern Remuneration Advisory, the Company’s remuneration adviser • Representatives of Eversheds Sutherland, the Company’s corporate legal adviser • Matthew Jones, the Company Secretary, acts as secretary to the Committee 78 78 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 a) Annual Statement Dear Shareholders, Introduction On behalf of the Board, I am pleased to introduce the Remuneration Committee report for the financial year ended 31 March 2017. In the past, as an AIM listed company, we produced a Remuneration Committee report which provided information over and above the requirements of our listing. However, this is the first formal remuneration report that the Company has had to produce following its listing on the Main Market of the London Stock Exchange. It has been a busy year for the Committee. In addition to the normal business of the Committee, we introduced new performance conditions for the Company’s Performance Share Plan, oversaw new Executive Director service contracts as part of the Group’s move to the Main Market, made an additional long term incentive award to the Chief Financial Officer and introduced a formal Remuneration Policy in accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendments) Regulations 2013 and consulted with shareholders on its implementation. Alongside the development of the Remuneration Policy, the Company developed a new annual bonus plan to operate from the 2017/18 financial year. Link between remuneration and strategy The principal role for the Committee is to operate the Group’s remuneration policy which is to ensure that the Directors and senior managers are paid in a way that attracts, retains, motivates and rewards management of the highest quality, aligns Shareholders’ and executives’ interests and promotes a direct relationship between results and reward, reflecting best practice appropriate to the size and stature of the Group. The strategy of the Company is to deliver superior returns to shareholders, both in dividends and capital growth, over the long term and within a prudent risk management framework. The remuneration policy of the Company supports this in its choice and pitching of performance targets for both annual bonus and performance share awards which include strong comparative performance elements. The policies on bonus deferral into shares, the new additional two year holding period following vesting for performance share awards and the shareholding guideline aligns executives with shareholders to support the Company’s long term objectives. The principles behind these policies are disseminated in the remuneration arrangements of all employees as appropriate in the light of seniority. Performance and decisions on remuneration taken in 2016/17 The Company produced excellent financial results for the year with cash profits from operations growing by 24% to £58 million, and the Company increasing its fully covered ordinary dividend by over 8% to 20.0 pence per share. In addition, a special dividend of 3.0 pence per share has also been declared. Assets under management increased by 14% to £1.3 billion. The normal maximum bonus for 2016/17 was 100% of basic salary, however this could be increased to 150% on the basis of exceptional performance. The Executive Directors delivered successfully against a range of financial, operational and strategic objectives including, but not exclusively, paying a progressive, fully covered dividend, increasing the value of assets under management and transitioning the business from AIM to the Main Market. Bonuses paid in respect of the year to 31 March 2017 to each of the Executive Directors was 100% of base salary received for the year and are set out in the table on page 94. The amount of this bonus which will be deferred into shares is 30%. No performance share awards were made to Executive Directors during the 2014 financial year and so none vested during the financial year 2017. In July 2016, the Committee granted awards under the Performance Share Plan which introduced new performance conditions. 50% of the award is subject to a Total Shareholder Return performance condition measured against the FTSE All Share Index. 50% is subject to a Total Accounting Return performance condition measured against UK REITs that report their NAV on an EPRA basis. The Committee believes that these performance conditions better reflect the strategy and objectives of the Company and provide improved alignment with shareholders. Further details on these performance conditions can be found on pages 94 to 95. As part of the move to the Main Market, the Group changed its domicile from Guernsey to the UK and a new UK holding company was incorporated. This necessitated new service contracts having to be drafted for the Executive Directors which complied with UK laws and listing regulations. Some legacy terms of the old service contracts were retained and further details of these can be found on page 90. Our executive team is rated highly in the sector and our aim is to ensure that their remuneration is competitive, motivating and sufficient to retain them. In the latter quarter of 2016, we held discussions with the Chief Financial Officer with the aim of securing his long term future with the Company. The remainder of the Board as a whole, took the view that the CFO played a key part in the Group’s success, was highly rated by its investors and therefore it was important to secure his long term future with the business. Accordingly, with effect from 1 January 2017, his salary was increased from £350,000 to £400,000 and later in January he was granted an additional award over 119,850 shares under the Performance Share Plan, being one times’ his new base salary. The performance conditions for which are described on pages 94 to 95. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 79 79 GOVERNANCE Implementation of policy for 2017/18 As the focus on executive pay continues, the Committee remains mindful of the developing remuneration landscape. Subject to approval at the AGM, the Committee will manage remuneration in line with the policy during 2017/2018. Detail on the proposed annual bonus structure and objectives is set out later in this report. The Committee anticipates making 2017 PSP awards to Executive Directors with a value of 100% of salary following the AGM. I would like to thank my fellow Committee members for their hard work and support during this busy year. I hope that you find the report helpful and informative and I look forward to receiving further feedback from our investors on the information presented. Kay Chaldecott Committee Chairman 15 May 2017 REMUNERATION COMMITTEE REPORT CONTINUED At this time, the Committee determined to increase the salary of the CEO from £425,000 to £450,000 and the salary of the Property Director from £400,000 to £425,000 from also effective 1 January 2017. These salary levels remain effective 1 April 2017. New Remuneration Policy The Remuneration Policy to be put to the 2017 AGM is intended to comply with the Investment Association Principles of Remuneration and to reflect current best practice. The Company has consulted on it with ten of its largest investors, holding 63% of the total voting rights in issue. Key features of the policy which I would like to draw to your attention are set out below: • • • the bulk of the policy remains in line with previous disclosures. The approaches to salary, benefits and pension are largely unchanged to what has been done in the past. The normal performance share plan award will remain 100% of salary with the exceptional maximum remaining at 200% of salary; the Company intends in the future normally to apply a two-year holding period following the vesting of PSP awards, lengthening the total period from award to release to five years; the Company will introduce a shareholding guideline for Executive Directors. Over five years from appointment, the Chief Executive Officer will be required to build up a holding of 200% of his base salary and other executives 100% of base salary. Currently each of the Executive Directors’ shareholding meets this guideline; • Malus and clawback will apply to both annual bonus and • PSP awards; It is proposed under the policy that the maximum bonus will be 125% of salary. The Company intends to continue to defer 30% of bonus into an award over shares with a two year vesting period; and • at the point of the move to the Main Market, some special terms in relation to termination were agreed between the Company and David Lockhart, Allan Lockhart and Mark Davies, the Founding Executive Directors. These special terms were agreed to reflect the rights under these Directors’ 2009 contract which the Directors gave up on entering into new contracts in August 2016 to bring their employment terms more closely into line with best practice. They are laid out on page 90 and principally relate to protections on termination, including rights in the event of a change of control and rights to annual bonus, deferred bonus shares and performance share awards granted before August 2016. These provisions will not form part of arrangements entered into with new Executive Directors. 80 80 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 (b) Proposed Directors’ Remuneration Policy 1. in respect of the ABP and the 2016 PSP, the annual review of performance measures, weighting and targets from year to year; 2. the determination of the extent to which performance measures have been met and the corresponding vesting or payment levels; 3. discretion required when dealing with a change of control or restructuring of the Group, special dividends and rights issues; 4. determination of the treatment of leavers based on the rules of the respective arrangement and the appropriate treatment chosen, including the pro-rating of awards; and 5. the manner in which share awards can be satisfied (i.e. from the Employee Benefit Trust, newly issued shares, treasury shares, or market purchased shares). In relation to awards granted under the 2009 PSP and/or the 2016 PSP, the Committee has discretion to waive or amend performance targets on the occurrence of any event or events which causes the Committee reasonably to consider that such target should be waived or that a different or amended target would be a fairer measure of performance provided that any amendment may not cause the achievement of a target to be materially more difficult to perform or harder to achieve than the original task or target prior to such amendment. The Committee will not use this discretion to waive performance targets other than in exceptional circumstances or, in relation to the FEDs, as set out in this remuneration policy. It will consult with major shareholders in advance of using this discretion. The performance targets which apply to subsisting awards granted under the 2009 PSP and the 2016 PSP include a provision which provides that notwithstanding the extent to which performance targets have been met, the awards will only vest to the extent that the Committee (in its absolute discretion) is satisfied that the performance against the performance targets is a fair reflection of the underlying performance of the Company during the applicable performance period. Any use of the above discretions will be explained in the Annual Report for the financial year in which they were exercised and may, as appropriate, be the subject of consultation with the Company’s major shareholders. The remuneration policy is intended to apply, subject to shareholder approval at the Annual General Meeting to be held on 14 July 2017, from 1 April 2017 for a period of three years. When setting the remuneration policy, the Remuneration Committee (“the Committee”) has compared the levels being offered with those of its peers in the listed real estate investment trust sector. The policy is reviewed regularly to ensure that it continues to align the interests of Executive Directors with those of the Company’s Shareholders and to remain competitive. Discretions The Committee retains the absolute discretion to make any payments, even though they are not in line with the policy set out below, where the terms of the payment were agreed (a) before the policy came into effect; or (b) at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in consideration of the individual becoming a Director of the Company. Payments may include the Committee satisfying awards of variable remuneration and, in relation to any awards over shares, the terms of the payment will be determined by the Committee at the time the award is granted. Details of any such payments will be disclosed in the annual report on remuneration for the relevant year. Details of the relevant terms of the service agreements for the Founding Executive Directors (“FED”), being David Lockhart, Allan Lockhart and Mark Davies, under which payments were agreed prior to the policy coming into effect are described later in the policy on page 90. Subject to the discretion of the Committee, the Remuneration Policy may be amended to accommodate minor changes for administrative or legislative purposes without obtaining shareholder approval. Executive Directors hold awards granted under the NewRiver Retail Limited Deferred Bonus Plan 2015 (2015 DBP), the NewRiver Retail Limited Performance Share Plan 2009 (2009 PSP), the NewRiver Retail Limited Unapproved Share Option Plan 2009 (2009 USOP) and the NewRiver REIT plc Performance Share Plan 2016 (2016 PSP). The Committee will operate the NewRiver REIT plc Annual Bonus Plan 2016 (ABP), the 2015 DBP, the NewRiver REIT plc Deferred Bonus Plan 2016 (2016 DBP), the 2009 PSP, the 2016 PSP, the 2009 USOP, the NewRiver REIT plc Unapproved Share Option Plan 2016 (2016 USOP) and the NewRiver REIT plc Company Share Option Plan 2016 (2016 CSOP) according to their respective rules and in accordance with the Listing Rules where relevant. Consistent with market practice, the Committee retains certain discretions in respect of the operation and administration of these plans which include, but are not limited to: NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 81 81 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED Dividend equivalents Dividend equivalent shares will be added on to unvested awards under the 2015 DBP and the 2016 DBP and to unvested awards (including during any holding period) under the 2009 PSP and the 2016 PSP on a reinvested basis although this can be calculated in an alternative manner at the discretion of the Committee. Clawback and Malus In the event of gross misconduct, the material misstatement of financial information or an error is discovered in the calculation of award levels, the Committee has discretion to exercise malus and clawback provisions in respect of all share awards (other than the 2009 USOP and 2016 CSOP). The Committee may reduce the vesting of awards prior to vesting and/or require the repayment or reimbursement of awards which have already vested and been exercised across all incentive plans. The Committee may operate clawback on the terms stated above during the 24 months following the vesting date (after any holding period) of an award granted on the terms of the 2009 PSP and the 2016 PSP and at any time prior to the vesting date of an award granted on the terms of the 2015 DBP and the 2016 DBP. The Committee may also operate clawback in relation to cash bonuses paid under the ABP if the circumstances set out above apply during the 24 months following the payment of the cash bonus. Shareholder consultation The Committee’s policy is to consult with major Shareholders in respect of significant decisions on executive remuneration and has done so regularly. The Company has consulted with shareholders representing 63% of its register in respect of the formulation of this policy. Statement of consideration of employment conditions elsewhere in the Company The Committee does not consult directly with employees regarding Executive Director remuneration. However, pay and conditions throughout the Group are taken into consideration when setting remuneration policy. For senior employees who are not directors, remuneration is similar in structure to the executive pay structure but levels of remuneration and the weighting of variable pay available is lower. 82 82 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Remuneration Policy Summary Table Purpose & Link to Strategy Operation Maximum Performance Target Executive Directors Element Fixed Salary Market competitive remuneration base reflecting role, responsibilities, skills and experience Normally reviewed annually, effective 1 April although salaries may be reviewed more frequently or at different times of the year if the Committee determines this is appropriate Paid in cash monthly Reviewed in context of the salary increases across the Group Reviewed periodically against peer companies Pension To provide competitive post- retirement benefits To assist with recruitment and retention Benefits To provide a competitive and cost-effective benefits package To assist with recruitment and retention There is no Group pension scheme The Group has set up a Group personal pension plan The Company currently contributes 15% of base salary for all Executive Directors The Company contributes to employees’ individual personal pensions monthly. The Company reserves the right to pay a non-pensionable cash supplement in lieu of pension contributions The Company provides a range of non-pensionable benefits to Executive Directors which may include medical insurance, life assurance, permanent health insurance, holiday and sick pay Other benefits such as relocation allowances may be offered if considered appropriate and reasonable by the Committee There is no prescribed maximum Not Applicable Increases will typically be dependent on the results of an annual review in the context of the average increase for the wider work force, inflation and market data Increases will not normally be above the level implemented across the wider workforce. Increases may be above this level, for example if there is an increase in the scale, scope or responsibility of the role Salaries with effect from 1 April 2017 are: David Lockhart: £450,000 Allan Lockhart: £425,000 Mark Davies: £400,000 The maximum Company contribution is 15% of base salary Not Applicable Not Applicable Benefits are set at a level which the Committee considers appropriate when compared to the Company’s listed real estate investment trust peers There is no prescribed maximum For David Lockhart, the Company will reimburse him on a tax grossed- up basis for the cost of his personal private medical insurance policy not exceeding £12,000 per annum, subject to upward adjustments to reflect only any future increases in premium which are in line with general increases in market rates NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 83 83 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED Element Variable: Bonus Purpose & Link to Strategy Operation Maximum Performance Target To incentivise performance in the reporting year through the setting of targets at the beginning of the year. These annual targets are intended to be consistent with the Group’s long term strategy. The deferral of a proportion of the bonus in shares seeks to align directors’ interests with those of shareholders and to discourage short term decision making. All measures and targets relate to a financial year of the Company and are reviewed on an annual basis. For 2017/18, 80% of bonus will be paid on the basis of corporate targets and 20% of salary on the basis of personal performance targets. Corporate targets include relative TAR performance, relative earnings yield and meeting the Group’s financing policies in respect of loan to value, balance sheet gearing, interest cover and dividend cover. Awards of annual bonus are made pursuant to the ABP. The maximum bonus is 125% of salary. On target performance would result in bonus payment of 60% of maximum bonus. Threshold performance would result in bonus payment of 20% of maximum bonus. There is no maximum or minimum percentage of the bonus which is deferred into shares. The Committee has discretion to vary this percentage from year to year based on its assessment of circumstances at the time. All measures and targets will be reviewed and set annually by the Committee at the beginning of the financial year and levels of award determined by the Committee after the year end are determined based on achievement of performance against the stipulated measures and targets. The Committee retains an overriding discretion to reduce pay-outs from formulaic outcomes to ensure that overall bonus payments reflect its view of corporate performance during the year and are fair to both shareholders and participants. Paid in cash and in shares. The cash element is paid shortly following the completion of the audit for the year. Currently 30% of bonus is deferred into shares but this percentage is at the discretion of the Committee. The share element is deferred for a period which is currently two years (but this may be increased at the discretion of the Committee). Deferral of bonuses is achieved by means of awards of nil-cost options over shares pursuant to the 2016 DBP. Vesting of the deferred shares will normally be subject to continued employment. Non-pensionable. Clawback and malus provisions apply as stated on page 82. 84 84 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Element Variable Share Option plans Performance Share Plan Purpose & Link to Strategy Operation Maximum Performance Target Participation in a tax- advantaged Sharesave Plan or Share Incentive Plan and/or in the 2016 CSOP will be limited by reference to limits imposed by the applicable legislation from time to time. The maximum award level permitted under the 2016 PSP plan rules is 200% of salary. The normal annual award is 100% of salary for all Executive Directors. Awards currently vest on the following basis: • threshold performance delivers 25% of the shares awarded; and • maximum performance delivers 100% of the shares awarded Aligns the Executive Directors’ interests with those of shareholders. The Executive Directors may participate in all-employee share incentive plans established by the Company from time to time such as a tax-advantaged Sharesave Plan or Share Incentive Plan. To incentivise and reward the delivery of returns to shareholders and sustained long-term performance. Aligns the Executive Directors’ interests with those of shareholders. Rewards and helps retain/recruit executives. The Executive Directors may also be granted options under the CSOP 2016 and the USOP 2016. However, it is the Company’s current intention not to make any further awards under this type of plan. Discretionary grant of nil-cost options under the 2016 PSP and historically the 2009 PSP. Currently awards normally vest three years from the date of award. The vesting period may be increased at the discretion of the Committee. Vesting of awards is subject to satisfaction of performance targets. Targets are currently measured over a three-year period but this may be increased at the discretion of the Committee. In relation to each grant of awards, the Committee has discretion to determine the applicable performance targets and their weightings to ensure they are appropriate. Unless the Committee determines otherwise, following the conclusion of the vesting period, a holding period of two years will apply before participants are entitled to receive their shares (normally subject to continued employment). Clawback and malus provisions apply as stated on page 82. Not Applicable Performance targets will apply in respect of a performance period which will not be less than three years. Currently, awards are subject to the following targets: • • the target applicable to 50% of the shares which are subject to an award is based on Total Accounting Return relative to certain UK-REITs that report on an EPRA accounting basis; and the target applicable to 50% of the shares which are subject to an award is based on Total Shareholder Return relative to the FTSE All Share Notwithstanding the extent to which the performance targets are met, awards shall only vest if the Committee (in its absolute discretion) is satisfied that performance against the conditions is a fair reflection of underlying performance. Details of awards made under the 2016 PSP and 2009 PSP are shown on pages 96 to 98. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 85 85 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED Element Shareholding Requirement Purpose & Link to Strategy To encourage long term share ownership and support alignment of interests with shareholders. Fees To provide market- competitive director fees. Performance Target Not Applicable Operation Maximum The Company operates a shareholding requirement which is subject to periodic review. Executive Directors are expected to build up a shareholding within five years of appointment worth 200% of base salary for the CEO and 100% of base salary for other Executive Directors. Unvested share options and shares which are subject to awards do not count for the purposes of the shareholding requirement. Chairman and Non-Executive Directors Fee increases are applied in line with outcome of the review. Not Applicable Current fees are as follows: Chairman: £100,000 NED Base fee: £50,000 Senior Independent Non-Executive Director: £5,000 Chairman of the Audit Committee: £5,000 Chairman of the Remuneration Committee: £5,000 Annual fee for the Chairman. Annual base fee for the Non- Executive Directors. Additional fees are paid to Non-Executive Directors for additional responsibilities such as being the Senior Independent Non-Executive Director or chairing a Board Committee. Fees are reviewed from time to time taking into account time commitment, responsibilities and fees paid by companies of a similar size and complexity. Payable in cash. Expenses incurred by Non-Executive Directors fulfilling their roles are charged to the Company and then reimbursed. 86 86 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Illustration of Remuneration Policy The table below illustrates the remuneration opportunity provided to each Executive Director in line with the policy set out on pages 81 to 91 at different levels of performance for the 2017/18 financial year. Three scenarios have been illustrated for each Executive Director: 1. Minimum performance: 2. On target performance: The illustrations do not take into account share price appreciation or dividends. David Lockhart David Lockhart 2000k 1500k 1000k 500k 0 £974k 11.5% 34.6% 53.8% £524k 100% £1,536k 29.2% 36.6% 34.1% Minimum On Target Maximum Allan Lockhart Allan Lockhart 2000k 1500k 1000k 500k 0 £916k 11.6% 34.8% 53.6% £491k 100% £1,447k 29.4% 36.7% 33.9% Minimum On Target Maximum Mark Davies Mark Davies 2000k 1500k 1000k 500k 0 £861k 11.6% 34.8% 53.6% £461k 100% £1,361k 29.4% 36.7% 33.9% Minimum On Target Maximum Fixed Bonus PSP comprising the minimum remuneration receivable (being base salary and pension allowances for the 2017/18 financial year and benefits calculated using the 2016/17 figures as set out in the table on page 92; comprising fixed pay, an annual bonus payment at 60% of the maximum opportunity (75% of salary) and long-term incentive awards vesting at 25% of maximum opportunity (25% of salary); and 3. Maximum performance: comprising fixed pay, 100% of annual bonus (125% of salary) and 100% vesting of long- term incentive awards (100% of salary). Service Contracts All of the FEDs have a service contract terminable by either party giving the other 12 months’ written notice. The notice period for new Executive Directors will not exceed 12 months on either side. For new Executive Directors, if notice is served by either party, the Executive Director may continue to receive base salary, benefits and pension for the duration of their notice period during which time the Company may require the individual to fulfil their current role or may place the individual on garden leave. The Company may elect to make a payment of base salary, plus an amount in lieu of benefits/pension contribution/equivalent or just base salary, in lieu of notice. At the time of the Company’s admission to trading on the Main Market in August 2016, each of the FEDs entered into new service contracts. These contracts contain special provisions relating to termination of employment (as described further in this policy on page 90) reflecting these individuals’ status as founder directors and certain terms of their previous service contracts. These special terms will not be included in the contracts of new Executive Directors who are recruited externally or who are promoted from within the Group. The service agreements are available to shareholders to view at the Company’s Registered Office on request from the Company Secretary and at the Annual General Meeting. Non-Executive Directors’ Letters of appointment Non-Executive Directors each have a Letter of Appointment and their remuneration is determined by the Board. The initial appointment of a Non-Executive Director is for three years and their appointment is terminable on three months’ notice on either side. Non-Executive Directors do not participate in any of the Company’s bonus or share schemes. The letters of appointment are available to shareholders to view at the Company’s Registered Office on request from the Company Secretary and at the Annual General Meeting. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 87 87 GOVERNANCE Chairman or a Non-Executive Director takes on an executive function. Termination of employment and change of control Ongoing policy Excepting the service contracts for the FEDs, payments in lieu of notice will be limited to the Director’s basic salary for the unexpired portion of the notice period. The Committee will aim to minimise the level of payments to that Director, having regard to all circumstances, including the Company’s contractual obligations to the Director, the reason for departure, and the Company’s policy on mitigation. Where a Director may be entitled to pursue a claim against the Company in respect of his/her statutory employment rights or any other claim arising from the employment or its termination, the Committee will be entitled to negotiate settlement terms with the Director that the Committee considers to be reasonable in the circumstances and is in the best interests of the Company, and to enter into a settlement agreement with the Director. The Committee has discretion to pay a Director’s legal fees in relation to a settlement agreement. In addition to the contractual provisions regarding payment on termination set out above, the Group’s incentive plans and share plans contain provisions relating to termination of employment and change of control. The policy in respect of the different circumstances is laid out in the table below. Certain awards granted to FEDs have different terms, and these are set out in the table opposite. REMUNERATION COMMITTEE REPORT CONTINUED External Directorships and Memberships Executive Directors are encouraged to take up one external directorship, subject to the prior approval of the Board. In considering the appointment, the Board will consider whether the appointment will have an adverse impact on the Director’s role within the Company and whether it will be a conflict of interest. Fees earned may be retained by the Director. At present, no Executive Director has an external directorship. Executive Directors and employees are also encouraged to join, when invited, advisory committees of industries and professional bodies directly related to the Company’s business. This helps to keep the Company informed of any future regulations or trends which may affect it in the future, as well as providing the opportunity to influence future decision making. Currently, the Company has representatives on various committees of the British Property Federation, the Property Finance Forum and on the Revo Marketing Committee and Purple Apple Marketing Awards Task Force. Recruitment Arrangements The Committee will apply the same remuneration policy and principles when setting the remuneration package for a new Executive Director. The Committee will take into consideration all relevant factors to ensure that pay arrangements are in the best interests of the Company and its shareholders. Ongoing benefits, pension provisions, annual bonus participation and awards under both the 2016 DBP and the 2016 PSP will be in line with those stated in the policy. Different performance measures may be set for any initial awards under the ABP and 2016 PSP taking into account the responsibilities of the individual and the point in the year that they joined and the rules of the applicable plan. The rationale will be clearly explained in the Annual Report following such recruitment. The level of bonus which may be paid will be pro-rated to reflect the time in the year when the Executive Director joins. In addition, the Committee will have discretion to make payments or awards to buy out incentive arrangements forfeited on leaving a previous employer, i.e. over and above the approach outlined in the table above and may exercise the discretion available under Listing Rule 9.4.2R if necessary to do so. In doing so, the Committee will seek, to the best possible extent, to do no more than match the fair value of the awards forfeited, taking account of the applicable performance conditions, the likelihood of those conditions being met and the proportion of the applicable vesting period remaining. Where an Executive Director appointment is an internal candidate, the Committee will honour any pre-existing remuneration obligations or outstanding variable pay arrangements that relate to the individual’s previous role. The Committee retains the discretion to offer appropriate remuneration outside the standard policy where an interim appointment is made to fill an executive role on a short term basis or where exceptional circumstances require that the 88 88 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Component Annual bonus Deferred Bonus Plan (awards under the 2015 DBP and 2016 DBP) Long-term Incentive Plan (awards made under the 2009 PSP and 2016 PSP) 2009 USOP, 2016 USOP and 2016 CSOP Good leaver Other leaver Change of control Bonuses become payable in an amount determined by the Committee, and no proportion will be deferred. All awards vest in full and may be exercised within 6 months of the transaction. Awards may be exercised immediately, subject to the applicable performance condition (which may be modified to reflect early exercise) being met. In the event of vesting before the normal vesting date, the number of shares will be pro-rated downwards for time, unless the Committee determines otherwise. Pro-rating will not apply to any awards that vest during a holding period that applies after the normal vesting date. Options may be exercised immediately. Bonus may be paid at the Committee’s discretion for the period worked, taking into consideration performance during that period. Awards will normally vest on the date of leaving and will be exercisable in the 6 month period following such date (12 months in the case of death). The number of shares can, at the discretion of the Committee, be reduced on a pro-rata basis to reflect the time between grant and the leave date compared with the vesting period. Other than in the case of death, the Committee can determine that the awards will become exercisable within the 6 months following the vesting date. The vesting of awards will be subject to the satisfaction of applicable performance conditions (which may be modified to reflect early exercise). If the employee ceases employment before the normal vesting date, awards may be pro-rated downwards for time at the discretion of the Committee. If an employee dies, his awards will be exercisable within the 12 month period following the date of death. In other circumstances, awards will normally be exercisable during the 12 month period following the vesting date of the award, save that the Committee may allow the awards to be exercised within 12 months of the cessation of employment. Pro-rating will not apply to any awards if the employee ceases employment during a holding period that applies after the normal vesting date. If an employee dies, his options will be exercisable within the 12 month period following the date of death. In other circumstances, unvested options will normally be exercisable during the 6 month period following the vesting date of the option, save that the Committee may allow the options to be exercised within 6 months of the cessation of employment. Vested options will normally be exercisable during the 6 month period following the date of cessation. The option may, at the discretion of the Committee, be pro-rated downwards for time. No bonus amounts will be paid if the employee ceases employment or gives or is given notice to terminate employment prior to the date of payment. Outstanding awards will immediately lapse in full, unless the Committee, in its absolute discretion, permits them to be exercisable within a period determined by the Committee but expiring no later than 12 months after cessation of employment or 12 months after the date of vesting on such terms as the Committee may determine. Outstanding awards will immediately lapse in full, unless the Committee, in its absolute discretion, permits them to be exercisable within a period determined by the Committee but expiring no later than 12 months after cessation of employment or 12 months after the date of vesting on such terms as the Committee may determine. Outstanding awards will immediately lapse in full, unless the Committee, in its absolute discretion, permits them to be exercisable within a period determined by the Committee expiring no later than 6 months after cessation of employment on such terms as the Committee may determine. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 89 89 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED Good leaver provisions relate to termination of office or employment by reason of death, ill-health, injury, incapacity or disability of the award holder or (other than in the case of the ABP and 2015 DBP) the award holder’s spouse or registered civil partner, or redundancy of the award holder or sale or transfer out of the Group or the Company or undertaking employing that employee, or (in the case of the 2009 PSP and 2016 PSP) any other circumstances stipulated by the Committee at the date of award. For awards granted prior to 1 June 2015 under the 2009 PSP and awards granted under the 2009 USOP, retirement also constitutes a Good leaver reason. For awards granted under the ABP, the Committee also has discretion to determine that any leaver is a Good leaver. Other leaver relates to individuals who leave for any other reason. Any discretion exercised by the Committee shall be on a case by case basis. No payment for compensation for loss of office will be made to the Chairman or any Non-Executive Director other than where the Company determines that fees for the notice period should be paid. Arrangements for the FEDs The Founding Executive Directors founded NewRiver Retail Limited in 2009. This company was registered in Guernsey and listed on AIM. Each FED had a service contract with that company which was considered appropriate for an AIM listed company. When NewRiver moved its listing from AIM to the main market, NewRiver REIT plc was incorporated in the UK and new service contracts which were considered appropriate for a main market listed company were entered into. When moving to their new service contracts, the FEDs gave up certain contractual rights in their original contracts to ensure that their new contracts were in keeping with best practice and the UK Corporate Governance Code. For example, each FED gave up the right to: (1) have 12 months’ average bonus included in any payment in lieu of notice on termination; (2) the right to an immediate payment in lieu of notice, instead accepting that the payment should be paid in six monthly instalments and subject to reduction in the event of a breach discovered after termination; (3) the right to a liquidated damages payment in the event that the Company sought to terminate the contract in breach other than in limited circumstances. In addition, David Lockhart and Allan Lockhart gave up rights regarding their notice periods & working and payment in lieu of notice. Accordingly, the Company has included clauses in the FED’s contracts which are unique to them and recognise what they have sacrificed so that their new service contracts comply more closely with best practice and the UK Corporate Governance Code. These clauses will not form part of a contract for a new Executive Director. Clauses Unique to the FEDs The Company has discretion to make a payment in lieu of all or part of any unexpired notice period at the rate of 125% base salary for that period. The Company may choose to pay in instalments over a 6 month period. Where a FED is constructively dismissed, the Company is required to pay 125% of base salary. If within 12 months of any change of control any FED’s employment is terminated (other than for cause) or he is constructively dismissed, the Company is required to pay 125% of base salary. The Company may put a FED on garden leave for up to six months’ at any time after notice is given or received, during which period he continues to receive salary and all other benefits. Where a FED’s employment ceases part-way through a bonus year other than (1) for cause; or (2) due to voluntary resignation (which, in the case of David Lockhart, shall not include retirement), he will be entitled to any unpaid bonus earned for the prior year and remains eligible for a bonus for any part of his notice period worked or while on garden leave. Where a FED’s employment is terminated within 12 months of a change of control (other than for cause) or he is constructively dismissed, in addition to an immediate payment in lieu of notice of 125% base salary he will also be entitled to pro-rata bonus up to the termination date and compensation for loss of bonus for the notice period calculated by reference to his three year average bonus. Where a FED resigns within 12 months of a change of control, the Company may require him to work the first 6 months of his notice period or place him on garden leave for that period and shall on the expiry of the applicable period pay an immediate lump sum of 125% base salary in lieu of remaining notice. The FED shall remain eligible for bonus for any period of worked notice and/or garden leave served. For awards granted under the 2009 PSP prior to 1 June 2015, if David Lockhart or Allan Lockhart is a Good leaver, he may normally exercise these awards within the 12 month period after cessation of employment. These awards are not pro-rated on cessation of employment. For awards granted under the 2009 USOP, David Lockhart and Allan Lockhart will additionally be a good leaver if they terminate office or employment following receipt of notice from his employer in accordance with the terms of his service agreement (other than where such notice is given in circumstances where he may be summarily dismissed in accordance with the terms of his service agreement with his employer), or in circumstances constituting constructive dismissal. If David Lockhart or Allan Lockhart is a Good leaver, he may normally exercise his awards granted under the 2009 USOP within the 12 month period after cessation of employment. Awards granted under the 2009 USOP held by David Lockhart or Allan Lockhart are not pro-rated on cessation of employment. 90 90 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 For awards granted under the 2015 DBP and/or the 2016 DBP, the Committee is contractually obliged to exercise discretion to treat FEDs as good leavers if their employment terminates other than for (1) cause or (2) voluntary resignation so that their awards are exercisable at a time determined by the Committee no later than the earlier of 12 months from the termination date and the 1st anniversary of vesting of the award. The Committee is contractually bound to exercise discretion to treat the FEDs as good leavers and preserve subsisting 2009/2016 PSP awards in all circumstances where a FED’s employment terminates other than for (1) cause or (2) voluntary resignation. The awards remain in force until the usual vesting date and vesting is subject to performance targets and time pro-rating (subject to the Committee’s discretion to disapply). Where the FED is not required to work full notice, pro rating (if any) will be applied assuming the full 12 month notice period was worked. In respect of all PSP awards, when considering the exercise of its discretion in connection with the extent of vesting in connection with cessation of employment and/or a change of control event, the Committee will act fairly and reasonably and in good faith taking into account the following: (1) where relevant, shareholder value derived by shareholders during the performance period applicable to the relevant award/in connection with the change of control; and/or (2) the FED’s actual contribution and the contribution he would have likely made during the performance period for the award (but for early termination or the change of control occurring); and (3) any other factors it considers relevant. The Committee is contractually bound to treat David Lockhart as a good leaver and to preserve his 2009 PSP/2016 PSP awards (1) on cessation of employment but remaining / moving to be a Non-Executive Director (in which case pro-rating is disapplied up to the point the NED role ceases), and (2) in event of ill-health of his wife or long-term partner (in which case time pro-rating applies subject to the Committee’s discretion). NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 91 91 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED (c) Annual Report on Remuneration This section is subject to an advisory vote at the AGM. Single figure total remuneration for the Executive Directors (audited) The following table shows a single figure total of remuneration for the 2017 financial year for each of the Executive Directors and compares this figure to the prior year. Year Salary £ Benefits1 £ Pension £ Subtotal for fixed pay £ Cash bonus £ Value of bonus deferred into shares £ Value of additional deferred share award2 £ Long-term incentive plans3 £ Subtotal for variable pay £ Total £ David Lockhart 2017 431,250 2016 400,000 – 64,688 495,938 301,875 – 50,000 450,000 420,000 129,375 180,000 – 250,734 681,984 497,200 245,307 1,342,507 1,177,922 1,792,507 Allan Lockhart Mark Davies 2017 406,250 2016 350,000 2,342 60,938 469,530 284,375 395,714 367,500 1,964 43,750 121,875 157,500 – 220,107 626,357 423,200 245,307 1,193,507 1,095,887 1,589,221 2017 362,500 2016 300,000 1,760 54,375 408,635 253,750 339,103 315,000 1,603 37,500 108,750 135,000 – 187,571 550,071 266,900 191,615 908,515 958,706 1,247,618 Nick Sewell4 – 2017 2016 200,000 – – 1,283 25,000 226,283 – – – – – – – – – – – – 226,283 1. Benefits are the Director’s private medical cover 2. This additional award over deferred shares was made on 30 March 2016 and vests after two years on 30 March 2018 3. For 2017, this is the value of the 1 July 2014 long-term incentive plan awards. For details of the awards and their performance conditions, see page 99 4. Nick Sewell resigned as a Director on 12 January 2016. However, he is still an employee of the Group and the details above show his remuneration to the date he resigned as a Director 5. No payments were made to past directors, or for loss of office, during the year 92 92 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Single figure total remuneration for the Non-Executive Directors (audited) The following table shows a single figure total of remuneration for the 2017 financial year for each of the Non-Executive Directors and compares this figure to the prior year. Paul Roy Chris Taylor Kay Chaldecott Alastair Miller1 Andrew Walker1 Year 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Base Fee £ 100,000 75,000 50,000 50,000 50,000 40,000 50,000 11,000 – 31,000 Audit Committee Chairman £ Remuneration Committee Chairman £ Senior Independent Non-Executive Director £ – – 5,000 – – – – – – – – – – – 5,000 – – – – – – – 5,000 – – – – – – – Total £ 100,000 75,000 60,000 50,000 55,000 40,000 50,000 11,000 – 31,000 1. Alastair Miller was appointed a Director on 12 January 2016 and Andrew Walker resigned as a Director. The fees for 2016 are shown from/to 12 January 2016 respectively. 2. No payments were made to past directors, or for loss of office, during the year. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 93 93 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED Salaries When the Committee implemented changes to the remuneration package of the CFO it also reviewed the base salary for the other Executive Directors as outlined in the annual statement from the Chairman of the Remuneration Committee. With effect from 1 January 2017, the Executive Directors base salaries were increased as follows: David Lockhart: Allan Lockhart: Mark Davies: £450,000 £425,000 £400,000 (5.88% increase from £425,000) (6.25% increase from £400,000) (14.29% increase from £350,000) Fees Fees payable to the Chairman and Non-Executive Directors were as follows: Chairman Basic fee for a Non-Executive Director Additional fee for serving as Chairman of the Audit and Remuneration Committees Additional fee for serving as the Senior Independent Non-Executive Director The fees were last increased on 1 April 2016. £100,000 £50,000 £5,000 £5,000 Annual bonus for the year to 31 March 2017 The Company commenced the year as an AIM company and operated a discretionary annual bonus scheme under which bonuses were paid to executives for achieving Group corporate and personal objectives. Based on the Company’s performance, as described in the Chief Executive’s strategic review on page 14, bonuses paid in respect of the year to 31 March 2017 are set out below and in the table on page 92. 70% was paid in cash and 30% into nil-cost share options deferred for two years in line with the Company’s proposed policy. David Lockhart: Allan Lockhart: Mark Davies: Total bonus paid: Total bonus paid: Total bonus paid: £431,250 £406,250 £362,500 (100% of salary received) (100% of salary received) (100% of salary received) The normal maximum bonus paid is 100% of base salary, however that could have been increased to 150% of base salary on the basis of exceptional performance. As described in the Remuneration Policy on page 84, a new bonus plan for FY18 onwards has been introduced which sets more detailed objectives and targets to be met by the Executive Directors which is in compliance with market norms. Retrospective disclosure of the targets and performance against them will be set out in the Remuneration Report for the year ending 31 March 2018, provided that they do not remain commercially sensitive at that time. Long-term Incentive Plans On 6 July 2016, the following Performance Share Plan awards were granted to Executive Directors as nil cost options: Executive David Lockhart Allan Lockhart Mark Davies Face/maximum value of awards at grant date* (% salary) £425,000 (100%) £400,000 (100%) £350,000 (100%) Number of shares comprising award % of award vesting at threshold 142,665 134,273 117,489 25 25 25 Vesting Period End Date 6 July 2019 6 July 2019 6 July 2019 * The closing price on the day before the grant date has been used to determine the maximum face value of the awards. This was £2.9790. On 17 January 2017, the following Performance Share Plan award was granted to the CFO as nil cost options: Executive Mark Davies Face/maximum value of awards at grant date* (% salary) £400,000 (100%) Number of shares comprising award1 119,850 % of award vesting at threshold 25 Vesting Period End Date 16 January 2020 1. The price used to set the number of shares awarded was the mid-market closing price on the day before the award was made and was £3.3375. 2. The award has a three year vesting period and, once vested, the award must be held for a further two years before it can be exercised. 94 94 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Each award is subject to clawback and malus provisions in line with the Company’s proposed policy. Each award is subject to two performance conditions which will be tested over a three year period. The performance conditions are outlined in further detail below: 50% of each award will be based on the Company's total shareholder return (TSR) compared to that of the FTSE All Share index (the TSR Benchmark). 50% of each award will be based on the Company's Total Accounting Return (TAR) compared to those UK REITs that report their NAV on an EPRA basis as at the date of award (the TAR Benchmark). TAR is defined as the annualised return over the performance period based on the change in EPRA NAV per share and the level of dividends paid per share. The range of targets, for both performance conditions, is as follows: Range Less than 100% of the index Equal to 100% of the index More than 100% but less than 125% of the index More than 125% but less than 150% of the index Equal to 150% of the index or more % award vesting 0 25 between 25 and 75 on a straight line basis between 75 and 100 on a straight line basis 100 The TAR Comparator Group was composed of the companies set out in the list below. Land Securities Group plc British Land Company plc Hammerson plc Intu Properties plc Segro plc Derwent London plc Shaftesbury plc Great Portland Estates plc Big Yellow Group plc Workspace Group plc Tritax Big Box REIT plc Londonmetric Property plc Assura plc Hansteen Holdings plc Redefine International plc Real Estate Investors plc Safestore Holdings plc Primary Health Properties plc Empiric Student Property plc Secure Income REIT plc GCP Student Living plc Standard Life Investments Property Income Trust Limited Regional REIT Limited Target Healthcare REIT Limited A&J Mucklow Group plc McKay Securities plc Schroder European Real Estate Investment Trust Limited NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 95 95 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED Summary of Directors Interests (audited) The beneficial interests of the Executive Directors in share awards and share options as at 31 March 2017 are shown in the following tables. Grant Date Plan Vesting by Exercise / share price at date of award £ At 1 April 2016 Granted Dividend equivalent shares added Lapsed Vested Exercised At 31 March 2017 David Lockhart 1 September 2009 26 September 2011 14 January 2013 1 July 2014 31 July 2015 28 September 2015 28 September 2015 30 March 2016 6 July 2016 14 June 2016 Total Unapproved Share Option Plan Unapproved Share Option Plan Performance Share Plan Performance Share Plan Deferred Bonus Plan Performance Share Plan – 3yr vesting period Performance Share Plan – 4yr vesting period Deferred Bonus Plan Performance Share Plan Deferred Bonus Plan Vested 1 July 2017 12 May 2017 28 September 2018 28 September 2019 30 March 2018 6 July 2019 14 June 2018 Vested 2.50 272,286 Vested 2.35 348,000 2.04 71,937 3.06 144,428 3.00 41,125 – – – – – – – – 9,109 2,593 – – – 272,286 – – – – – – – – – 348,000 – – – 71,937 153,537 43,718 3.40 120,887 – 7,625 – – – 128,512 3.40 120,887 3.26 152,515 – – 7,625 9,620 2.9790 – 142,665 6,764 3.158 – 56,998 2,701 1,272,063 199,663 46,037 – – – – – – – – – – – 128,512 162,135 149,429 – 59,699 1,517,765 96 96 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Grant Date Plan Vesting by Exercise / share price at date of award £ At 1 April 2016 Granted Dividend Equivalent Shares Added Lapsed Vested Exercised At 31 March 2017 Vested 2.50 192,686 Vested 2.35 338,000 2.04 71,937 3.06 126,787 3.00 50,379 – – – – – – – – 7,996 3,176 – – – 192,686 – – – – – – – – – 338,000 – – – 71,937 134,783 53,555 Allan Lockhart Unapproved Share Option Plan Unapproved Share Option Plan Performance Share Plan Performance Share Plan Deferred Bonus Plan Performance Share Plan – 3yr vesting period Performance Share Plan – 4yr vesting period Deferred Bonus Plan Performance Share Plan Deferred Bonus Plan 1 September 2009 26 September 2011 14 January 2013 1 July 2014 31 July 2015 28 September 2015 28 September 2015 30 March 2016 6 July 2016 14 June 2016 Total Vested 1 July 2017 12 May 2017 28 September 2018 28 September 2019 30 March 2018 6 July 2019 14 June 2018 3.40 105,776 – 6,671 – – – 112,447 3.40 105,776 3.26 129,815 – – 6,671 8,188 2.9790 – 134,273 6,365 3.158 – 49,873 2,363 1,121,156 184,146 41,430 – – – – – – – – – – – – 112,447 138,003 140,638 52,236 1,346,732 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 97 97 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED Grant Date Plan Vesting by Exercise / share price at date of award £ At 1 April 2016 Granted Dividend Equivalent Shares Added Lapsed Vested Exercised At 31 March 2017 Mark Davies 15 December 2009 17 March 2011 26 September 2011 1 July 2014 31 July 2015 28 September 2015 28 September 2015 30 March 2016 6 July 2016 14 June 2016 16 January 2017 Total Unapproved Share Option Plan Unapproved Share Option Plan Unapproved Share Option Plan Performance Share Plan Deferred Bonus Plan Performance Share Plan – 3yr vesting period Performance Share Plan – 4yr vesting period Deferred Bonus Plan Performance Share Plan Deferred Bonus Plan Performance Share Plan Vested 1 July 2017 12 May 2017 28 September 2018 28 September 2019 30 March 2018 6 July 2019 14 June 2018 16 January 2022 Vested 2.71 38,693 Vested 2.44 15,000 2.35 286,000 3.06 108,045 3.00 41,125 – – – – – – – – 6,815 2,593 3.40 90,664 – 5,717 3.40 90,664 3.26 81,871 – – 5,717 5,163 2.9790 3.158 – 117,489 – 42,748 5,569 2,025 3.3375 – 119,850 – – – – – – – – – – – – – (38,693) – (15,000) – (286,000) 0 0 0 – – – – – – – – – – 114,860 43,718 – 96,381 – – – – – 96,381 87,034 123,058 44,773 119,850 808,254 280,087 33,599 (395,885) 726,055 In December 2016, Mark Davies exercised his Unapproved Share Option Plan options that had been granted in 2009 and 2011, totalling 339,693 shares. He sold sufficient to cover his costs and tax liabilities and retained the balance as shares. 98 98 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Unapproved Share Option Plan The Unapproved Share Option Plan has vested and the participants have until the tenth anniversary from the date of grant for each award in which to exercise the options. The exercise price per share to be paid upon exercise is shown against each award. Performance Share Plan The performance conditions for the 2014 award are based on a three year performance period in terms of absolute Total Shareholder Return (“TSR”) and growth in adjusted EPRA earnings per share (“EPS”). The measures are weighted 50:50 so that half of the award depends on the performance of TSR and half on the growth in EPS. TSR will be measured from grant and EPS growth will be measured from the latest completed financial year. The performance period ended at 31 March 2017 and only the EPS performance condition had been met. Accordingly, only 50% of the 2014 award vested and is available to exercise. The 2015 PSP award was an enhanced award over 200% of salaries and was split into two awards, with the first award being measured against a three year performance period and the second award being measured against a four year performance period. The performance conditions are the same for both awards and are as follows: TSR performance condition • 33.4% of the award is subject to a TSR performance condition. 25% of the award vests if TSR is 9% on a compound annual basis over the three year and four year vesting periods with full vesting at 16% (with straight-line vesting in between). EPRA EPS performance condition • 33.3% of the award is subject to an EPRA EPS performance condition. 25% of the award vests if the compound annual percentage growth in the Adjusted EPRA EPS over the three year and four year vesting periods is 5% per annum with full vesting at 12% (with straight-line vesting in between). Net Asset Value per share plus dividends (‘NAV’) performance condition • the remainder of the award is subject to a NAV performance condition. 25% of the award vests if the compound annual percentage growth in the Adjusted EPRA NAV on a compound annual basis over the three year and four year vesting periods is 9% per annum with full vesting at 16% (with straight-line vesting in between). Details of the Directors’ Shareholdings and Rights to Shares (audited) Shares held at 31 March 2017 Value of holding as % of salary* Unvested DSBP awards held at 31 March 2017** Unvested PSP awards held at 31 March 2017** Vested but unexercised PSP awards held at 31 March 2017 Vested but unexercised USOP awards held at 31 March 2017 Unconverted warrants held at 31 March 2017 Total held as at 31 March 2017 David Lockhart Allan Lockhart Mark Davies Paul Roy Chris Taylor Kay Chaldecott Alastair Miller 1,554,600 277,944 124,838 240,000 10,000 3,774 30,000 1,167 221 105 n/a n/a n/a n/a 265,552 243,794 175,525 n/a n/a n/a n/a 559,990 500,315 550,530 n/a n/a n/a n/a 71,937 71,937 n/a n/a n/a n/a n/a 620,286 530,686 n/a n/a n/a n/a n/a 121,149 12,221 n/a n/a n/a n/a n/a 3,193,514 1,636,897 850,893 240,000 10,000 3,774 30,000 * based on the closing share price of £3.3780 as at 31 March 2017. Shareholding guidelines are for the CEO to hold a minimum number of shares with a value in excess of 200% of his base salary and for the other Executive Directors to hold a minimum number of shares with a value in excess of 100% of their base salary ** includes dividend equivalent shares added to that date DSBP = Deferred Share Bonus Plan PSP = Performance Share Plan USOP = Unapproved Share Option Plan There have been no changes in the number of shares held from 31 March 2017 to 15 May 2017, being the latest practicable date before the publication of this Annual Report. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 99 99 GOVERNANCE REMUNERATION COMMITTEE REPORT CONTINUED Historic performance and chief executive remuneration The following information allows comparison of the Company’s TSR (based on share price growth and dividends reinvested) with the remuneration of David Lockhart, CEO, over the last seven years. 250 200 150 100 50 FY11 FY12 FY13 FY14 FY15 FY16 FY17 NewRiver FTSE 250 UK IPD Retail FTSE 350 REIT The chart shows the Company’s TSR and that of the FTSE250, the UK IPD Retail Index, and the FTSE350 REIT Indices based on an initial investment of £100 on 1 April 2010 and values at intervening financial year ends over a seven year period to 31 March 2017. Since the Company was a constituent of all of the indices during the majority of the year, these are considered to be appropriate benchmarks for the graph. Chief Executive Officer remuneration for year ended 31 March Total Remuneration (£) Annual Bonus (% of max) Total LTIP vesting (% of max) 2011 337,500 42 – 2012 467,500 36.5 – 2013 504,000 32.63 – 2014 642,000 68.95 – 2015 1,095,307 66.67 – 2016 1,547,200 100 50 2017 1,177,922 66.67 – Chief Executive Pay Compared to NewRiver Employees (remuneration received % change 2016 to 2017) The table below shows the percentage change in salary benefits and bonus between the years ended 31 March 2016 and 31 March 2017 for both the Chief Executive Officer and the average for all permanent employees of the Group. Chief Executive All Employees Salary 7.81% 15.57% Benefits 0% 2% Annual Bonus -28.12 -16% Relative importance of spend on pay The table below shows the all-employee pay spend and returns to shareholders by way of dividends for 2017. Figures from 2016 are provided for comparison. Total spend on Employee Pay1 Total Distributions to Shareholders2 Notes: £’000 2017 8,707 46,132 £’000 2016 8,796 28,220 % difference from prior year -1.0 +63.5 1. 2. Includes salaries, bonuses, social security costs and pension costs as shown in the notes to the Financial Statements on page 127. Includes the figures shown in the notes to the Financial Statements on page 130. 100 100 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 What the Executive Directors can earn in 2017/18 Salaries and fees Following the increase in salaries effective 1 January 2017, there were no changes to salaries for the Executive Directors effective 1 April 2017. The fees for the Non-Executive Directors did not change either. Pensions and benefits remain as described in the policy table above. Annual Bonus Subject to the approval of the proposed policy, the annual bonus arrangements for the financial year ending 31 March 2018 will operate on the basis and within the parameters laid out in the policy section of this report. Executive Directors will have the opportunity to earn a bonus up to a maximum of 125% of salary on the basis of the achievement on achievement of the following measures. Measure Corporate Performance Personal Total Accounting Return v IPD All Retail Earnings yield (FFO) v comparative peer group Compliance with financing policies Achievement against a number of business, strategic, organisational, stakeholder and financial targets tailored to the role of each Executive Director Proportion of salary payable For on target performance: 62.5% For stretch performance: 100% For on target performance: 12.5% For stretch performance: 25% The measures have been selected to reflect a range of key financial and operational goals which support the Company’s strategic objectives. The respective targets have not been disclosed as they are commercially sensitive. However, retrospective disclosure of the targets and performance against them will be set out in the Remuneration Report for the year ending 31 March 2018 provided that they do not remain commercially sensitive at that time. Long-term Incentives – Performance Share Plan Performance Share Plan awards granted to Executive Directors in the financial year ended 31 March 2018 will be over shares worth 100% of salary and will be consistent with the long-term incentives policy detailed on page 85. The targets and weightings will be the same as those described on page 95. Awards will be subject to two year holding period after the vesting date, i.e. for a period of five years from the grant date. External Advice to the Committee During the year the Committee received advice on executive remuneration from h2glenfern Remuneration Advisory, which has previously provided advice to the Committee. Fees are charged on a cost incurred basis and totalled £61,400 in the year to 31 March 2017. Another division within h2glenfern provides corporate advice to the Company. h2glenfern Remuneration Advisory has confirmed that it has operated in accordance with the Code of Conduct of the Remuneration Consultants’ Group in relation to executive remuneration consulting in the United Kingdom. The Committee has therefore satisfied itself that all advice provided by h2glenfern was objective and independent. 2016 Annual General Meeting Shareholder Vote NewRiver Retail Limited was an AIM listed company at the time of the AGM in 2016 and was not required to produce a remuneration report or have a vote on it. However as a company registered in Guernsey, it was a Guernsey legal requirement for NewRiver Retail to put the directors’ remuneration to a vote at its AGM in 2016. Accordingly, shareholders holding: 182,270,065 shares voted in favour (99.58%); and 762,308 shares voted against (0.42%) Shareholders holding 6,133 shares withheld their votes. Signed on behalf of the Board Kay Chaldecott, Committee Chairman 15 May 2017 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 101 101 GOVERNANCE DIRECTORS’ REPORT Directors’ report For the year ended 31 March 2017 The Directors present their report and Group financial statements for the year ended 31 March 2017. Principal activities and status NewRiver REIT plc (“the Company”) is a premium listed REIT on the London Stock Exchange and a constituent of the FTSE250 and EPRA Indices. The Company is a specialist real estate investor, asset manager and developer focused solely on the UK retail and leisure sector. On 16 August 2016, the Group completed its move from AIM to the premium listing segment of the official list, trading on the Main Market of the London Stock Exchange. NewRiver REIT plc became the ultimate parent company, with the former parent company, NewRiver Retail Limited, becoming a direct subsidiary of NewRiver REIT plc, via a Scheme of Arrangement. For further details about the Scheme of Arrangement, see page 119. Strategic Report The Strategic Report for the year ended 31 March 2017 is set out on pages 14 to 63 and contains a fair review of the business of the Group during the year including a description of the principal risks and uncertainties, an indication of likely future developments in the business on pages 20 to 21 and disclosures concerning Greenhouse Gas Emissions on page 61. Results and dividend The results for the year are set out in the Financial Statements. During the year the Group paid quarterly interim dividends totalling £46.1 million (2016: £28.2 million). Further details on the dividend payments are set out in Note 11 to the Financial Statements. The Board The Directors, who served throughout the year unless stated otherwise, are detailed below: Paul Roy Non-Executive Chairman David Lockhart Chief Executive Officer Mark Davies Allan Lockhart Chris Taylor Chief Financial Officer Property Director Senior Independent Non-Executive Director – resigned 9 April 2017 Kay Chaldecott Non-Executive Director Alastair Miller Non-Executive Director The Board recognises the requirement of the UK Corporate Governance Code (“the UK Code”) regarding the segregation of roles and division of responsibilities between the Chairman and Chief Executive and has complied with this requirement during the year. 102 102 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 The Board has determined that a major part of its role is the overall strategy of the Group and to consider the following matters which are key to the performance of the Group: • implementation of the agreed business strategy to focus on value creating retail and leisure property opportunities; • ensuring adequate funding is in place to implement the Group’s business model; • monitoring of cash management policies and cash • flow forecasts; the methodology and results of three year business plans for each asset held; • responsibility for the financial reporting procedures and safeguarding the Group’s assets and those held in joint ventures; • approval of the annual and interim financial statements and annual budget; • review of quarterly management accounts including forecasts; • dividend policy and approval of all dividend payments; the performance of and relationships with key service • providers including corporate brokers and advisers; • any significant fees payable to any related party; • monitoring key performance indicators; and • establishing and maintaining appropriate delegated authorities and internal controls and risk management policies and procedures. Articles of Association The rules governing the appointment and replacement of Directors are contained in the Company’s Articles of Association. Changes to the Articles of Association must be approved by shareholders in accordance with legislation in force from time to time. A copy of the Company’s Articles of Association can be found on the Company’s website, www.nrr.co.uk. Substantial shareholdings As at 31 March 2017, the Company has been advised under DTR5 by shareholders with holdings of more than 3% of the total voting rights of the Company as follows: Shareholder Woodford Investment Management LLP1 Invesco Limited Blackrock Inc.2 Standard Life Investments AXA Framlington Number of ordinary shares % of Issued Share Capital 58,840,369 35,050,682 15,461,238 7,643,831 7,131,840 25.19 14.98 6.60 3.27 3.05 1. On 18 April 2017, the Company was advised that Woodford Investment Management LLP had increased its holding to 27.27% of the total voting rights. 2. On 21 April 2017, the Company was advised that Blackrock Inc. had increased its holding to 6.75% of the total voting rights. Directors’ interests Directors in the shares of the Company as at 31 March 2017 were: Paul Roy David Lockhart Mark Davies Allan Lockhart Chris Taylor1 Kay Chaldecott Alastair Miller 31 March 2017 Number of Ordinary Shares 31 March 2016 Number of Ordinary Shares 240,000 1,554,600 240,000 1,497,000 124,838 277,944 10,000 3,774 30,000 69,545 277,944 10,000 3,774 30,000 1. As at the date of his resignation, 9 April 2017 There were no changes in their holdings between 31 March 2017 and the date of this report. All related party transactions are disclosed in Note 25 on page 144. Financial instruments The Group’s exposure to and management of capital risk, market risk and liquidity risk is set out in Note 24 to the Group’s financial statements. Directors’ indemnification and insurance The Company’s articles of association provide for the Directors’ and officers’ of the Company to be appropriately indemnified, subject to the provisions of the Companies Act 2006. The Company purchases and maintains insurance for the Directors’ and officers’ of the Company in performing their duties, as permitted by section 233 Companies Act 2006. Share Capital The Company only has one class of share capital, being ordinary shares with a nominal value of one pence each. Details of the share capital, including the rights and obligations attached to the ordinary shares issued during the year ended 31 March 2017, are summarised in Note 21 of the financial statements. At the Annual General Meeting held in 2016, shareholders authorised market purchases of the Company’s ordinary shares, limited to 14.99% of the issued share capital at that time, as well as the allotment of new shares within certain limits approved by shareholders. These authorities expire are the AGM in 2017 and appropriate renewals will be sought. The Company also has 376,849 warrants to subscribe for ordinary shares in issue. These warrants were issued when NewRiver Retail Limited listed in 2009 and were converted across on the same terms and conditions to warrants in NewRiver REIT plc when the Company listed on the Main Market in August 2016. Each warrant can be surrendered for one ordinary share at a current subscription price of 142p per share. The warrants in issue have to be exercised by 1 September 2019 otherwise they will lapse. There are no securities of the Company carrying special rights with regards to the control of the Company in issue. Disclosure of information to Auditors The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s Auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and ensure that the Auditor is aware of such information. Auditor Deloitte LLP has expressed its willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. Political Donations No political donations were made by the Company or its subsidiaries during the year (2016: Nil). Post Balance Sheet Events For details of post balance sheet events, see Note 26 on page 144. Annual General Meeting The Annual General Meeting will be held at 12.00 noon on 14 July 2017 at the offices of Eversheds Sutherland (International) LLP, One Wood Street, London EC2V 7WS. At the meeting, resolutions will be proposed to receive the Annual Report and financial statements, approve the Directors’ remuneration and remuneration policy, re-elect Directors and reappoint and determine the remuneration of Deloitte LLP. In addition, it will be proposed that expiring authorities to allot shares and to repurchase shares are extended. Internal controls review Taking into account the principal risks provided on pages 56 to 57 and the ongoing work of the Audit Committee in monitoring the risk management and internal control systems on behalf of the Board as described on pages 72 to 75, the Directors: • are satisfied that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; and • have reviewed the effectiveness of the risk management and internal control systems and no significant failings were identified. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 103 103 GOVERNANCE DIRECTORS’ REPORT CONTINUED Viability Statement For the year ended 31 March 2017 In accordance with provision C2.2 of the 2016 revision of the UK Corporate Governance Code, the Board has assessed the prospects of the Group over a longer period than the 12 months that has in practice been the focus of the ‘Going Concern’ provision. On the basis of this and other matters considered by the Board during the year, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three year period of their detailed assessment. Going concern The Directors of NewRiver REIT plc have reviewed the current and projected financial position of the Group making reasonable assumptions about future trading and performance. Further details of the process followed are on page 120. The Directors’ Report was approved by the Board of Directors and is signed on its behalf by: Matthew Jones Company Secretary 15 May 2017 The Board, as part of its strategy process, has assessed the viability of the Group over a three year period to March 2020 as this timeframe gives greater certainty over the forecasting used. When assessing the Group’s long-term viability, the Board considered the Group’s existing investment commitments, available financial resources and long-term financing arrangements. They also considered profits; the three year cash flow forecast for the portfolio, the Group’s funding requirements, REIT compliance and other key financial ratios over the period, as well as the headroom in the financial covenants contained in our various loan agreements. In making their assessment, the Directors assessed the potential impacts, in severe but plausible scenarios, of the principal risks as set out on pages 56 and 57 together with the likely degree of effectiveness of mitigating actions reasonably expected to be available to the Group. The most relevant, with the highest potential impact, of these risks on viability were considered to be: • market/economic changes such as higher interest rates, reduced availability of credit and increasing investment yields restricting development and causing valuation falls; • a decline in property valuations as a result of investment decisions could result in lower income and capital returns to shareholders than forecast and expose them to unforeseen risks and liabilities; and • poor control of development projects could lead to • inadequate returns on investment and over exposure to developments could put pressure on cash flow and debt financing. the Group has a significant portion of borrowings that fall due within one year of the balance sheet date. The Directors are currently in advanced negotiations with the existing lenders and with some new lenders to agree facilities to refinance the existing borrowings. The Directors are confident that these bank facilities can be refinanced, or in the absence of available bank finance that the properties could be sold at a value significantly above the associate borrowing. The nature of the Group’s business as the owner and asset manager of a diverse income producing portfolio of shopping centres, retail warehouses, high street assets, and public houses located throughout the UK and let to a wide variety of national tenants reduces the impact of adverse changes in the general economic environment or market conditions in any one sector on the Group. 104 104 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Directors’ Responsibilities Statement The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. We confirm that, to the best of our knowledge: • • • the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. This responsibility statement was approved by the Board of Directors on 15 May 2017 and is signed on its behalf by: David Lockhart Chief Executive Officer 15 May 2017 Mark Davies Chief Financial Officer The Group’s annual report for the year ended 31 March 2017 contains the following statement of Directors’ responsibilities. Certain parts of the annual report are not included within this announcement. The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group’s financial statements in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required by International Accounting Standard 1 to: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IRFSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 105 105 GOVERNANCE INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF NEWRIVER REIT PLC Opinion on financial statements of NewRiver REIT plc In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 March 2017 and of the Group’s profit for the year then ended; • • • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 (FRS 101) “Reduced Disclosure Framework”; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The financial statements that we have audited comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Company Balance Sheets, the Consolidated Cash Flow Statement, the Consolidated and Company Statements of Changes in Equity and the related notes 1 to 26 and A to D. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101 “Reduced Disclosure Framework”. Summary of our audit approach Key risks The key risks that we identified in the current year were: • Valuation of shopping centre, high street and retail warehouse portfolio; • Valuation of pub portfolio; and • Accounting for investment property acquisitions and disposals Within this report, any new risks are identified with and any risks which are the same as the prior year identified with . Materiality Scoping The materiality that we used in the current year was £13,691,000 which was determined on the basis of approximately 2% of shareholders equity. We performed a full scope audit to respond to the risks of material misstatement for the Group and performed an audit of specified account balances for the joint venture entities. Together these elements account for 100% of the Group's net assets and 100% of profit before tax. Significant changes in our approach There have been no significant changes to our audit approach in 2017, other than focussing our accounting for investment property acquisitions and disposals risk to the acquisition of the Bexleyheath properties. 106 106 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Going concern and the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the group As required by the Listing Rules we have reviewed the directors’ statement regarding the appropriateness of the going concern basis of accounting contained within note 1 to the financial statements and the Directors’ statement on the longer-term viability of the group contained within the Directors’ Report on page 104. We confirm that we have nothing material to add or draw attention to in respect of these matters. We agreed with the Directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s ability to continue as a going concern. We are required to state whether we have anything material to add or draw attention to in relation to: • • • • the Directors’ confirmation on page 74 that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; the Disclosures on pages 55 to 57 that describe those risks and explain how they are being managed or mitigated; the Directors’ statement in note 1 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the group’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and the Directors’ explanation on page 120 as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Independence We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and confirm that we are independent of the group and we have fulfilled our other ethical responsibilities in accordance with those standards. We confirm that we are independent of the group and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards. Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 107 107 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT CONTINUED Valuation of shopping centre, high street and retail warehouse portfolio Risk description NewRiver REIT plc owns and manages a portfolio of commercial property assets. The valuation of shopping centre, high street and retail warehouse portfolio (including a number of development properties) is a significant judgement area and is underpinned by a number of assumptions. How the scope of our audit responded to the risk The Group uses professionally qualified external valuers to fair value its portfolio at six-monthly intervals. The portfolio (excluding development properties) is valued using the ‘investment method’ of valuation, in which the principal assumptions include estimated include rental values and capitalisation yields. Development properties are valued by applying the same methodology, but with a deduction for all future costs necessary to complete the development together with an allowance for remaining risk, developers’ profit and purchasers’ costs (‘the residual method’). The Group's share of property assets are valued at £952.8 million (2016: £797.3 million) of which £818.2 million are held by subsidiaries (2016: £663.2 million) and £134.6 million by joint ventures (2016: £134.1 million). Please see note 1 and 12 to the financial statements and discussion in the report of the Audit Committee on page 74. We assessed, in consultation with our property valuation specialists, management’s process for reviewing and challenging the work of the external valuer and development appraisals. We also assessed the competence, independence and integrity of the external valuer. In consultation with our property valuation specialists, we performed detailed analysis of the valuations for a sample of properties in the portfolio. We performed audit procedures to assess the integrity of information provided to the independent valuer including agreement on a sample basis back to underlying lease agreements. Alongside our property valuation specialists, we held discussions with the external valuers of the portfolio to understand the valuation process, performance of the portfolio and significant assumptions and critical judgement areas, including estimated rental values and yields. We benchmarked these assumptions to relevant external industry data and comparable property transactions, in particular the yield. For development properties we assessed future costs to complete based on development appraisals. We assessed the classification of development properties and whether the methodology applied (i.e. investment or residual method) was appropriate. We also challenged the allowances in the valuation for developers’ profit. Key observations We have concluded that the assumptions applied in arriving at the fair value of the Group's shopping centre, high street and retail warehouse portfolio by the external valuers were appropriate and that resulting valuations were within an acceptable range. 108 108 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Valuation of pub portfolio Risk description NewRiver REIT plc owns a pub portfolio with fair value of £177.8 million (2016: £176.0 million) comprising 350 pubs (195 in the Trent portfolio and 155 in the Mantle portfolio). The extent and variety of judgements involved in the valuation of the pub portfolio is different to the rest of the investment property portfolio due to the specific operational nature of the properties, as well as the contractual arrangements in place with Marston’s, the Co-op and LT Pub Management. The Group uses professionally qualified external valuers to fair value its portfolio at six-monthly intervals. Within the portfolio, 285 pubs (fair value of £122.6m) are valued as income producing pubs using the ‘investment method’ of valuation, whereby the principal assumptions include income from fair maintainable trade (“FMT”) and capitalisation multiples. The 34 development properties (fair value of £24.7m) are valued using a gross development value calculated as initial rent due upon completion of the development with an applied capitalisation yield; less a deduction for future costs to complete and an allowance for planning risk, developers’ profit and purchasers’ costs (‘the residual method’). In addition to the above there are 22 properties where a new rental agreement has been signed with Marston’s (fair value of £14.9m) and 9 completed development properties delivered to the Co-op (fair value of £14.3m). These are valued using the ‘investment method’ of valuation, where the principal inputs include rental values and capitalisation yields. Please see note 1 and 12 to the financial statements and discussion in the report of the Audit Committee on page 74. How the scope of our audit responded to the risk We assessed, in consultation with our property valuation specialists, management’s process for reviewing and challenging the work of the external valuer and development appraisals. We also assessed the competence, independence and integrity of the external valuer. Alongside our property valuation specialists, we held discussions with the external valuers of the portfolio to understand the valuation process, performance of the portfolio and significant assumptions and critical judgement areas. This included the following specific procedures for each part of the pub portfolio: In respect of the income producing pubs: • We engaged with our internal valuation specialists in order to benchmark the capitalisation multiples applied by the external valuers against relevant industry data and market transactions. • For a sample of pubs we benchmarked FMT adopted by the external valuer against actual historic performance (including contracted fixed rent, beer volumes and beer margin), corroborating explanations for any differences. In respect of the development properties: • For a sample of development properties and alongside our internal valuation specialists, we challenged and corroborated movements in valuations. • This included verification of underlying costs and stage of completion to reports from the Group's external quantity surveyors and agreeing planning risk assumptions to reports provided by the Group's external planning consultants. • Through consultation with our internal valuation specialist, we also considered whether the allowances in the valuation for developers’ profit were consistent with industry adopted allowances. In respect of the remaining properties: • We engaged with our internal valuation specialists in order to benchmark the capitalisation yields applied by the external valuers for the Marston's and Co-op leases against relevant industry data and comparable property transactions. • We agreed contracted rent back to underlying lease agreements with Marston's and the Co-op. Key observations We have concluded that the assumptions applied in arriving at the fair value of the Group's pub portfolio by the external valuers were appropriate and that resulting valuations were within an acceptable range. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 109 109 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT CONTINUED Accounting for investment property acquisitions and disposals Risk description The structure of acquisition and disposal agreements can be complex and the accounting treatment needs to accurately reflect the nature of the transaction, which can be dependent on the specific terms within the legal documentation. The acquisition of Bexleyheath, with a gross property value of £120 million, represents the Group’s largest acquisition to date. The transaction was completed through the purchase of two corporate vehicles. This transaction was considered to be an area of significant risk as the transaction involved the acquisition of two corporate vehicles rather than a direct asset acquisition. Judgement is required to determine whether the transaction was the acquisition a group of assets, or a business combination in the scope of IFRS 3. This was determined to represent an asset acquisition and therefore accounted for in accordance with the requirements of IAS 40 Investment property. The Group continued to recycle capital through a number of other acquisitions and disposals, none of which were considered to be material or complex by nature. Please see note 1 to the financial statements and discussion in the report of the Audit Committee on page 74. In respect of Bexleyheath, we considered management’s analysis of the transaction and assessed their rationale for concluding that it represented an asset acqusition. In particular, we challenged management to demonstrate that the two corporate vehicles acquired did not constitute a business. We have examined relevant documents including the sale and purchase agreement to confirm the consideration paid and other particulars of acquisition, including agreement of a sample of related costs to supporting documentation. We reviewed the accuracy of the accounting entries made. In determining whether other acquisitions and disposals were considered to be material or complex by nature, we made inquiries of management, examined the sale and purchase agreements for a sample of transactions and recalculated the relevant accounting entries made. We also reviewed the completeness and accuracy of disclosures presented in the financial statements in relation to transactions in the year. How the scope of our audit responded to the risk Key observations We have concluded that the accounting for investment property acquisitions and disposals, including the acquisition of the Bexleyheath property, have been appropriately accounted for and disclosed within the financial statements. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 110 110 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group materiality £13,691,000 (2016: £13,620,000) Basis for determining materiality Rationale for the benchmark applied We determined materiality for the Group based on approximately 2% (2016: 2%) of shareholders' equity. In determining materiality, we considered the balances on which the users of the financial statements would judge the performance of the Group. As net asset value takes into consideration the valuation of the Group’s property portfolio, we determined the shareholders equity of to be a key performance indicator for shareholders. In addition to net assets, we consider EPRA earnings to be a critical performance measure for the Group and a measure used within the Real Estate industry. For account balances and classes of transactions that affect EPRA earnings we applied a lower level materiality threshold of £2,260,000 (2016: £1,349,000), being approximately 5% (2016: 5%) of EPRA earnings. We agreed with the Audit Committee that this was appropriate as EPRA earnings is a key performance measure for the Group but is a relatively low amount compared to our overall Group materiality set out above. Group materiality £13.69m Audit Committee reporting threshold £0.273m NAV £684.5 NAV Group materiality We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £273,000 (2016: £272,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 111 111 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT CONTINUED An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and assessing the risks of material misstatement at the Group level. We performed a full scope audit to respond to the risks of material misstatement for the Group and performed an audit of specified account balances for the joint venture entities. Together these elements account for 100% (2016: 100%) of the Group's net assets and 100% (2016: 100%) of Group’s profit before tax. Our audit work was executed at levels of Group or EPRA earnings materiality applicable to each account balance. The audit of the Group’s joint venture with Morgan Stanley Real Estate Fund (“MSREF”), which has a 31 December 2016 year end, is carried out by BDO LLP. Other joint ventures of the Group are audited by PriceWaterhouseCoopers LLP and also have 31 December 2016 year ends. We have obtained and reviewed audited financial statements and held detailed discussions with the joint venture auditors to understand the scope of their audit, findings and overall conclusions. At the parent entity level we also tested the consolidation process. We have obtained an understanding of the Group’s system of internal controls and undertaken a combination of procedures, all of which are designed to target the Group’s identified risks of material misstatement in the most effective manner possible. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and the Directors’ Report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. Corporate Governance Statement Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to the company’s compliance with certain provisions of the UK Corporate Governance Code. Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or • otherwise misleading. In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We have nothing to report in respect of these matters. We have nothing to report arising from these matters. We have nothing to report arising from our review. We confirm that we have not identified any such inconsistencies or misleading statements. 112 112 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. David Becker (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Guernsey, Channel Islands 15 May 2017 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 113 113 FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2017 Gross income Property operating expenses Net property income Administrative expenses Share of income from joint ventures Net valuation movement Profit on disposal of investment properties Operating profit Finance income Finance costs Revaluation of derivatives Profit for the year before taxation Taxation Profit for the year after taxation IFRS earnings per share (pence) Basic Diluted Operating and financing 2017 £’000 Fair value adjustments 2017 £’000 96,100 (15,705) 80,395 (15,375) 6,033 – 894 71,947 61 (15,200) – 56,808 (1,201) 55,607 – – – – (769) (15,030) – (15,799) – – (3,607) (19,406) – (19,406) Notes 4 5 6 13 12 7 8 8 8 9 10 10 Total 2017 £’000 96,100 (15,705) 80,395 (15,375) 5,264 (15,030) 894 56,148 61 (15,200) (3,607) 37,402 (1,201) 36,201 15.5 15.4 Operating and financing 2016 £’000 Fair value adjustments 2016 £’000 60,840 (6,253) 54,587 (13,747) 8,559 – 8,299 57,698 82 (12,237) – 45,543 (136) 45,407 – – – – 4,489 19,513 – 24,002 – – – 24,002 – 24,002 Total 2016 £’000 60,840 (6,253) 54,587 (13,747) 13,048 19,513 8,299 81,700 82 (12,237) – 69,545 (136) 69,409 39.2 38.9 All activities derive from continuing operations of the Group. The notes form an integral part of these financial statements. During the year, the Group completed its move to the Main Market and reorganised via a scheme of arrangement. See paragraph 2 of note 1 for details of how the reorganisation has impacted the financial statements. 114 114 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Profit for the year after taxation Other comprehensive income Revaluation of derivatives reclassified to profit or loss Revaluation of derivatives recognised in equity Group’s share of joint ventures’ other comprehensive income Revaluation of derivatives reclassified to profit or loss Revaluation of derivatives recognised in equity Total comprehensive income for the year Notes 16 16 2017 £’000 36,201 1,959 – (117) – 38,043 2016 £’000 69,409 – (1,278) – 126 68,257 All items in the consolidated statement of comprehensive income will be recycled to the income statement. The notes form an integral part of these financial statements. During the year, the Group completed its move to the Main Market and reorganised via a scheme of arrangement. See paragraph 2 of note 1 for details of how the reorganisation has impacted the financial statements. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 115 115 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET AS AT 31 MARCH 2017 Non-current assets Investment properties Investments in joint ventures Property, plant and equipment Derivative financial instruments Total non-current assets Current assets Trade and other receivables Derivative financial instruments Cash and cash equivalents Total current assets Total assets Current liabilities Borrowings Trade and other payables Current taxation Derivative financial instruments Total current liabilities Non-current liabilities Derivative financial instruments Borrowings Total non-current liabilities Net assets Equity Share capital Share premium Merger reserve Hedging reserve Retained earnings Total equity Net asset value (NAV) per share Basic Diluted Notes 2017 £’000 2016 £’000 12 13 14 16 15 16 17 19 18 16 16 19 21 21 21 21 21 10 10 995,928 71,763 351 626 1,068,668 5,373 – 45,956 51,329 1,119,997 100,084 28,729 1,200 160 130,173 2,291 302,995 305,286 684,538 2,340 1,691 (2,335) – 682,842 684,538 839,107 70,125 551 – 909,783 8,462 384 114,071 122,917 1,032,700 – 25,632 136 – 25,768 2,960 314,105 317,065 689,867 2,334 – (2,334) (1,842) 691,709 689,867 292p 290p 295p 294p The notes form an integral part of these financial statements. During the year, the Group completed its move to the Main Market and reorganised via a scheme of arrangement. See paragraph 2 of note 1 for details of how the reorganisation has impacted the financial statements. The financial statements were approved by the Board of Directors on 15 May 2017 and were signed on its behalf by: David Lockhart Chief Executive NewRiver REIT plc Registered number: 10221027 Mark Davies Chief Financial Officer 116 116 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 CONSOLIDATED CASH FLOW STATEMENT AS AT 31 MARCH 2017 Cash flows from operating activities Profit for the year before taxation Adjustments for: Profit on disposal of investment property Net valuation movement Net valuation movement in joint ventures Share of income from joint ventures Net interest expense Revaluation of derivatives Rent free lease incentives Movement in provision for bad debts Amortisation of legal and letting fees Depreciation on property plant and equipment Share based-payment expense Cash generated from operations before changes in working capital Changes in working capital Decrease/(increase) in receivables and other financial assets Increase in payables and other financial liabilities Cash generated from operations Interest paid Corporation tax paid Dividends received from joint ventures Net cash inflow from operating activities Cash flows from investing activities Interest income Purchase of investment properties Properties acquired in business combinations Disposal of investment properties Development and other capital expenditure Investment in joint venture Purchase of plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of new shares Repayment of bank loans New borrowings Purchase of derivatives Dividends paid Net cash generated from financing activities Cash and cash equivalents at beginning of the year Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 31 March 2017 £’000 2016 £’000 37,402 69,545 (894) 15,030 419 (5,683) 15,139 3,607 (1,949) (98) 345 106 1,434 64,858 873 1,132 66,863 (13,273) (137) 6,050 59,503 61 (162,208) – 10,012 (15,511) (2,541) (138) (170,325) 1,839 (65,943) 153,630 (819) (46,000) 42,707 114,071 (68,115) 45,956 (8,299) (19,513) (4,489) (8,559) 12,155 – (103) 75 259 125 898 42,094 (2,050) 18,454 58,498 (12,237) – 4,325 50,586 82 (192,583) (105,447) 51,109 (12,955) – (163) (259,957) 292,300 (21,873) 65,311 – (27,708) 308,030 15,412 98,659 114,071 During the year, the Group completed its move to the Main Market and reorganised via a scheme of arrangement. See paragraph 2 of note 1 for details of how the reorganisation has impacted the financial statements. The notes form an integral part of these financial statements. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 117 117 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 31 MARCH 2017 As at 31 March 2015 Profit for the year after taxation Fair value loss on financial derivatives Total comprehensive income for the year Transactions with equity holders Net proceeds of issue from shares Share-based payments Dividend paid As at 31 March 2016 Profit for the year after taxation Fair value on financial derivatives Total comprehensive income for the year Transactions with equity holders Net proceeds of issue from shares Share-based payments Dividends paid As at 31 March 2017 Notes 16 21 22 11 16 21 22 11 Share capital £’000 1,271 – – – 1,063 – – 2,334 – – – 6 – – 2,340 Share premium £’000 – – – Merger reserve £’000 (1,271) – – Hedging reserve £’000 (690) – (1,152) Retained earnings £’000 340,385 69,409 – Total £’000 339,695 69,409 (1,152) – – – – – – – – 1,691 – – 1,691 – (1,152) 69,409 68,257 (1,063) – – (2,334) – – – (1) – – (2,335) – – – (1,842) – 1,842 309,237 898 (28,220) 691,709 36,201 – 309,237 898 (28,220) 689,867 36,201 1,842 1,842 36,201 38,043 – – – – 143 1,434 (46,645) 682,842 1,839 1,434 (46,645) 684,538 During the year, the Group completed its move to the Main Market and reorganised via a scheme of arrangement. See paragraph 2 of note 1 for details of how the reorganisation has impacted the financial statements. The notes form an integral part of these financial statements. 118 118 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies General information NewRiver REIT plc (the ‘Company’) and its subsidiaries (together the ‘Group’) is a property investment group specialising in commercial real estate in the UK. Scheme of arrangement During the year, the Group completed its move from AIM to the premium listing segment of the official list, trading on the Main Market of the London Stock Exchange. NewRiver REIT plc became the ultimate parent company, with the former parent company, NewRiver Retail Limited, becoming a direct subsidiary of NewRiver REIT plc, in a scheme of arrangement on 18 August 2016. The principal steps of the group reorganisation were as follows: NewRiver REIT plc was incorporated in the United Kingdom on 8 June 2016 under the Companies Act 2006 as a public company. On incorporation, the share capital of NewRiver REIT plc was £50,000.02 divided into 2 ordinary shares of 1 pence and 50,000 redeemable preference shares of £1. The preference shares were redeemed on 12 October 2016. As part of a scheme of arrangement under Guernsey law, all issued ordinary shares in the capital of NewRiver Retail Limited, the former holding company of the Group, were cancelled by way of a reduction of capital on 18 August 2016. Following the cancellation of the shares, NewRiver Retail Limited issued a corresponding number of ordinary shares to the Company, such that the Company held all of the issued shares in the capital of NewRiver Retail Limited. The Company has, in turn, issued ordinary shares to the former shareholders of NewRiver Retail Limited on a one-for-one basis. The result of the share cancellation and share issue is that the Company is now the ultimate parent company of the Group. Throughout the period from incorporation to 18 August 2016, NewRiver REIT plc was a dormant company with no revenues and no assets and did not constitute a business as defined by IFRS 3 Business Combinations. The transaction therefore falls outside the scope of that standard. Following the guidance regarding the selection of an appropriate accounting policy provided by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the transaction has been accounted for using the principles of merger accounting, allowed for group reconstructions, as set out in FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland. This policy, which does not conflict with IFRS, reflects the economic substance of the transaction as a continuation of the previous Group. The comparatives presented in these consolidated financial statements are therefore the consolidated results and financial positon of NewRiver Retail Ltd for the year then ended. In order to present equity as a continuation of the previous Group, share capital and reserves have been restated at the preceding reporting dates as follows: Share capital £’000 Merger reserve £’000 Other reserves £’000 Hedging reserve £’000 Share option reserve £’000 Revaluation reserves £’000 273,582 – – (273,582) – (1,271) (1,271) – – – (690) – – – (690) Retained earnings £’000 58,254 282,131 Total £’000 339,695 – 1,063 (1,063) 7,486 (7,486) – – – – – – – – – – 340,385 339,695 – 554,599 – (554,599) (1,842) – 1,961 (1,961) 16,901 (16,901) 573,461 118,248 689,867 – 1 April 2015 (as previously reported) Presentation of reserves Cancellation of shares in former parent company (no par value) Issue of new shares in new parent company (127,077,895 x 1p per share) 1 April 2015 (as currently reported) 1 April 2016 (as previously reported) Presentation of reserves Cancellation of shares in former parent company (no par value) Issue of new shares in new parent company (233,393,712 x 1p per share) 1 April 2016 (as currently reported) – – – 1,271 1,271 – – – – 2,334 2,334 (2,334) (2,334) – – – – – (1,842) – – – – – – – – – – 691,709 689,867 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 119 119 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 1 Accounting policies continued Going concern The Directors of NewRiver REIT plc have reviewed the current and projected financial position of the Group making reasonable assumptions about future trading and performance. The key areas reviewed were: • Value of investment property • Timing of property transactions • Capital expenditure and tenant incentives • Rental income • Loan covenants • Capital and debt funding The Group has cash and short-term deposits, as well as profitable rental income streams and as a consequence the Directors believe the Group is well placed to manage its business risks. Whilst the Group has borrowing facilities in place, as detailed in note 19, the Group is currently within all financial covenants. The Group has bank facilities to fund any future risk-controlled developments. The Group has a significant portion of borrowings that fall due within one year of the balance sheet date. The Directors are currently in advanced negotiations with the existing lenders and with some new lenders to agree facilities to refinance the existing borrowings. The Directors are confident that these bank facilities can be refinanced, or in the absence of available bank finance that the properties could be sold at a value significantly above the associate borrowing. After making enquiries and examining major areas which could give rise to significant financial exposure, the Board has a reasonable expectation that the Company and the Group have adequate resources to continue its operations for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in preparation of these financial statements. Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented. Basis of preparation Statement of compliance These financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards, as adopted by the European Union (‘IFRS’), therefore the Group financial statements comply with Article 4 of the EU IAS Regulation. The financial statements are presented in pounds Sterling. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of investment properties and derivatives which are stated at fair value. Cash flow statement The Group has reported the cash flows from operating activities using the indirect method. Interest received is presented within investing cash flows; interest paid is presented within operating cash flows. The acquisitions of investment properties are disclosed as cash flows from investing activities because this most appropriately reflects the Group’s business activities. Preparation of the consolidated financial statements The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries controlled by the Company, made up to 31 March each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intra group transactions are eliminated in full. Changes in accounting policy and disclosure In the current year, the following new and amended IFRSs and amendments have been adopted but have not had a material effect on the financial performance or position of the Group: IAS 1 (Amendments) Disclosure Initiative IAS 16 and IAS 38 (Amendments) – Clarification of Acceptable Methods of Depreciation and Amortisation IAS 27 (Amendments) Equity Method in Separate Financial Statements IFRS 11 (Amendments) Accounting for Acquisitions of Interests in Joint Operations IFRS 10, IFRS 12 and IAS 28 (Amendments) Investment Entities: Applying the Consolidation Exception • • • • • • Annual Improvements to IFRSs: 2012-2014 Cycle 120 120 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 • At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRSs that have been issued but are not yet effective: IAS 7 (Amendments) Disclosure Initiative IAS 12 (Amendments) Recognition of Deferred Tax Assets for Unrealised Losses IAS 40 (Amendments) Transfers of Investment Property IFRS 2 (Amendments) Classification and Measurement of Share-based Payment Transactions IFRS 4 (Amendments) – Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts IFRS 9 Financial Instruments IFRS 14 Regulatory Deferral Accounts IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases IFRIC 22 Foreign Currency Transactions and Advance Consideration • • • • • • • • • • The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future periods, except that IFRS 9 may impact both the measurement and disclosures of financial instruments, IFRS 15 may have an impact on revenue recognition and related disclosures and IFRS 16 may impact the recognition and measurement of leases on the Group’s balance sheet. Business combinations The Group applies the acquisition method to account for business combinations. The cost of the acquisition is measured at the aggregate of the fair values, at the date of completion, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquired. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS are recognised at their fair value at the acquisition. Where the fair value of the consideration is less than the fair value of the identifiable assets and liabilities then the difference is recognised as a bargain purchase in the income statement. Each acquisition is considered by management in light of the substance of the acquisition to determine whether the acquisition is a business combination or acquisition of investment property. Joint ventures Interests in joint ventures are accounted for using the equity method of accounting. The Group’s joint ventures are entities over which the Group has joint control with a partner. Investments in joint ventures are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the joint venture, less any impairment. In assessing whether a particular entity is controlled, the Group considers all of the contractual terms of the arrangement, whether it has the power to govern the financial and operating policies of the joint venture so as to obtain benefits from its activities, and the existence of any legal disputes or challenges to this control in order to conclude whether the Group controls the joint venture. Investment property Property held to earn rentals or for capital appreciation, or both, is classified as investment property. Investment property comprises both freehold and leasehold land and buildings. Investment property is recognised as an asset when: It is probable that the future economic benefits that are associated with the investment property will flow to the Company; • • There are no material conditions precedent which could prevent completion; and • The cost of the investment property can be measured reliably. Investment property is measured initially at its cost, including transaction costs. After initial recognition, investment property is carried at fair value. Gains or losses arising from changes in the fair value of investment property are included in the income statement in the period in which they arise. When the Group begins to redevelop an investment property for continued future use as an investment property, the property remains an investment property. Investment property is derecognised when the risk and rewards of the property is transferred to the purchaser. Gains or losses on the sale of properties are calculated by reference to the carrying value at the end of the previous year, adjusted for subsequent capital expenditure. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 121 121 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 1 Accounting policies continued Property, plant and equipment Fixtures and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is recognised over the useful lives of the equipment, using the straight-line method at a rate of between 10% to 25% depending on the useful life. The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset. Operating leases As lessor The cost of securing an operating lease are capitalised within the carrying amount of the related investment property and amortised over the lease term. Revenue from operating leases is recognised as per the revenue recognition policy. As lessee Leases in which a significant portion of the risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments including prepayments, made under operating leases (net of any incentives received from the lessor) are charged to income statement on a straight-line basis over the period of the lease. Cash and cash equivalents Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less which are readily accessible. Financial instruments Financial assets Financial assets are classified as financial assets at fair value through profit or loss or loans and receivables as appropriate. The Group determines the classification of its financial assets at initial recognition. Financial assets are recognised upon becoming party to the contractual terms and are initially measured at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The fair value of a non-interest bearing asset is its discounted receivable amount. If the due date of the asset is less than one year, discounting is omitted. The Group’s financial assets consist of cash, loans and receivables and derivative instruments. The financial instruments classified as financial assets at fair value through profit or loss include interest rate swap and cap arrangements. Recognition of the derivative financial instruments takes place when the hedging contracts are entered into. They are recognised at fair value and transaction costs are included directly in finance costs. The fair values of derivative financial assets and financial liabilities are determined as follows: Interest rate swaps and caps are measured using the midpoint of the yield curve prevailing on the reporting date. The valuations do not include accrued interest from the previous settlement date to the reporting date. The fair value represents the net present value of the difference between the contracted rate and the valuation rate when applied to the projected balances for the period from the reporting date to the contracted expiry dates. Financial assets are derecognised only when the contractual rights to the cash flows from the financial asset expire or the Group transfers substantially all risks and rewards of ownership. The Group assesses at each financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence (such as significant financial difficulty of the obligor, breach of contract, or it becomes probable that the debtor will enter bankruptcy), the asset is tested for impairment. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (that is the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through use of an allowance account. The amount of the loss is recognised in the income statement. Trade receivables are carried at amortised cost less a provision for impairment where there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms. Impaired debts are derecognised when they are assessed as uncollectible. If in a subsequent period the amount of the impairment loss decreased and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent that the carrying value of the asset does not exceed its amortised costs at the reversal date. 122 122 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Financial liabilities Financial liabilities are classified at fair value through profit or loss or as other liabilities. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. All loans and borrowings are classified as other liabilities. Initial recognition is at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised costs using the effective interest method. Financial liabilities included in trade and other payables are recognised initially at fair value and subsequently at amortised cost. The fair value of a non-interest bearing liability is its discounted repayment amount. If the due date of the liability is less than one year, discounting is omitted. Hedge accounting Hedges of interest rate risk on firm commitments are designated as cash flow hedges where the hedge is expected to be highly effective. At the inception of the hedge relationship, the entity documents the relationship between the hedging instruments and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts previously recognised in Other Comprehensive Income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item is recognised in profit or loss, in the same line of the income statement as the hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss. Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. The cost of issuing share capital is recognised directly in equity against the proceeds from the share capital. Taxation Income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of the balance sheet. Tax is recognised in the income statement. Deferred tax Any deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply in the period when the liability is settled or the asset is realised. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Value added tax Revenues, expenses and assets are recognised net of the amount of value added tax except: • Where the value added tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the value added tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • Receivables and payables that are stated with the amount of value added tax included. The net amount of value added tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Share-based payments The cost of equity settled transactions is measured with reference to the fair value at the date at which they were granted. Where vesting performance conditions are non-market based, the fair value excludes the effect these vesting conditions and an estimate is made at each balance sheet date of the number of instruments expected to vest. The fair value is recognised over the vesting period in the income statement, with a corresponding increase in equity. Any change to the number of instruments with non-market vesting conditions expected to vest is recognised in the income statement for that period. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 123 123 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 1 Accounting policies continued Employee Benefit Trust The Group operates an Employee Benefit Trust for the exclusive benefit of the Group’s employees. The investment in the Company’s shares held by the trust is recognised at cost and deducted from equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of the shares held by the trust. Revenue recognition Rental income Rental income from fixed and minimum guaranteed rent reviews is recognised on a straight-line basis over the entire lease term. Where such rental income is recognised ahead of the related cash flow, an adjustment is made to ensure the carrying value of the related property including the accrued rent does not exceed the external valuation. Initial direct costs incurred in negotiating and arranging a new lease are amortised on a straight-line basis over the period from the date of lease commencement to the expiry date of the lease. Where a rent-free period is included in a lease, the rental income foregone is allocated evenly over the period from the date of lease commencement to the expiry date of the lease. Where a lease incentive payment, or surrender premiums is paid to enhance the value of a property, it is amortised on a straight-line basis over the period from the date of lease commencement to the expiry date of the lease. It is management’s policy to recognise all material lease incentives and lease incentives greater than six months. Upon receipt of a surrender premium for the early determination of a lease, the profit, net of dilapidations and non-recoverable outgoings relating to the lease concerned, is immediately reflected in income. Asset management fees Management fees are recognised in the income statement as the services are delivered. Promote payments The Group is contractually entitled to receive a promote payment should the returns from a joint venture to the joint venture partner exceed a certain internal rate of return. This payment is only receivable by the Group on disposal of underlying properties held by the joint venture or other termination events. Any entitlements under these arrangements are only accrued for in the financial statements once the Group believes that crystallisation of the fee is virtually certain. Dividends Dividends to the Company’s shareholders are recognised when they become legally payable. In the case of interim dividends, this is when paid. In the case of final dividends, this is when approved by equity holders. Finance income and costs Finance income and costs are recognised using the effective interest rate method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or a shorter period where appropriate, to the net carrying amount of the financial asset or financial liability. Service charge income and expense Service charge income is recognised in the accounting period in which the services are rendered and the related property expenses are recognised in the period in which they are incurred. Exceptional items Performance measures are adjusted to exclude exceptional items. Exceptional items are items that are significant in size or nature, or are non-recurring and are adjusted to explain the performance of the Group. In the current and comparative year exceptional items consist of the Group’s expenses in relation to the move from AIM to the Main Market. 124 124 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 2 Critical accounting judgements and estimates The preparation of financial statements requires management to make estimates affecting the reported amounts of assets and liabilities, of revenues and expenses, and of gains and losses. The key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. Estimates and judgements are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors. Significant judgements Investment properties The Group’s investment properties are stated at fair value, based on an independent external appraisal. The valuation of the Group’s development property portfolio and its joint ventures is inherently subjective due to, amongst other factors, the individual nature of each property, forecast trading EBITDA, the status of planning consent, the assumption that vacant possession will be obtained, development cost projections, tenant credit risk and the expected future rental income. As a result, the valuation of the Group’s development property portfolio is subject to a degree of uncertainty and is based on information available at the date of valuation. Taxation The Company has elected for REIT status. To continue to qualify from the regime, the Group is required to comply with certain conditions as defined in the REIT legislation. Management are required to exercise judgement to determine whether each property acquisition should be included within the REIT rental property income business and whether, on disposal of that property, any gain arising is capital or trading in nature and therefore whether it has triggered a tax charge to be payable to HMRC. The Group has unrecognised tax losses carried forward at 31 March 2017 as detailed in note 9. Judgement is required in assessing the likelihood that taxable income will be available to utilise the losses. Accounting for acquisitions Management must assess whether the acquisition of property through the purchase of a corporate vehicle should be accounted for as an asset purchase or a business combination. Management exercise judgement to determine whether the acquired business or property contains processes and inputs in addition to property. When management conclude that processes and inputs are being acquired in addition to the property then the transaction is accounted for as a business combination. Where there are no such items, the transaction is treated as an asset purchase. Business combinations are accounted for using the acquisition method any excess of the purchase consideration over the fair value of the net assets acquired is recognised as goodwill and reviewed annually for impairment. Any discount received or acquisition related costs are recognised in the income statement. Sources of estimation uncertainty As noted above, the Group’s investment properties are stated at fair value. The assumptions and estimates used to value the properties are detailed in note 12. Small changes in the key estimates, such as the estimated future rental income, can have a significant impact on the valuation of the investment properties, and therefore a significant impact on the balance sheet and key performances measures such as Net Asset Value per share. Certain estimates require an assessment of factors not within management’s control, such as overall market conditions. Rents and ERVs have a direct relationship to valuation, while yield has an inverse relationship. Estimated costs of a development project will inversely affect the valuation of development properties. There are interrelationships between all these unobservable inputs as they are determined by market conditions. The existence of an increase in more than one unobservable input could be to magnify the impact on the valuation. The impact on the valuation will be mitigated by the interrelationship of two unobservable inputs moving in directions which have an opposite impact on value e.g. an increase in rent may be offset by an increase in yield, resulting in no net impact on the valuation. The estimated fair value may differ from the price at which the Group’s assets could be sold. Actual realisation of net assets could differ from the valuation used in these financial statements, and the difference could be significant. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 125 125 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 3 Segmental reporting The chief operating decision maker is the Board of Directors. The Board of Directors are of the opinion that the principal activity of the Group is to invest in commercial real estate in the UK. IFRS requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the chief operating decision maker i.e. the Board of Directors. The internal financial reports received by the Board contain financial information at a Group level and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements. The property portfolio includes investment properties located throughout the UK, predominantly regional investments outside London and comprises a diverse portfolio of commercial buildings including shopping centres, retail warehouses, high street assets and pubs. The Directors consider that these properties all contribute to delivering on a strategy of targeting higher-yielding property that offer attractive returns through rental income. Therefore, these individual properties have been aggregated into a single operating segment. All of the Group’s properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided to the Board and, therefore, no geographical segmental analysis is disclosed. 4 Gross income Property rental and related income Asset management fees Realised gain received from joint venture Surrender premiums and commissions Gross income 2017 £’000 83,276 815 – 12,009 96,100 2016 £’000 54,109 870 3,373 2,488 60,840 In March 2017, the Group received a surrender premium of £10,788,000 in relation to a rental agreement from a retail warehouse in Sheffield. 5 Property operating expenses Service charge expense Amortisation of tenant incentives and letting costs Ground rent Rates on vacant units Other property operating expenses Property operating expenses 2017 £’000 4,888 1,456 3,187 2,013 4,161 15,705 2016 £’000 1,392 844 1,029 1,235 1,753 6,253 Property operating expenses have increased year on year by 151% whilst property rental and related income has increased by 54%. The principal reasons for the increase is presentation of costs in relation to the pub portfolio and the acquisition of a property in London with a significant ground rent. An element of the pub portfolio is transitioning from receiving a net rent to a leased model whereby the Group receives gross income and pays operating expenses. 126 126 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 6 Administrative expenses Wages and salaries Social security costs Other pension costs Staff costs Depreciation Share-based payments Operating lease payments Other administrative expenses Exceptional cost in respect of move from AIM to the main market Administrative expenses Net administrative expenses ratio is calculated as follows: Administrative expenses Adjust for: Asset management fees Exceptional cost in respect of move to the main market Share of joint ventures’ administrative expenses Group’s share of net administrative expenses Property rental and related income Share of joint ventures’ property rental income Net administrative expenses as a % of property income (including share of joint ventures) Average staff numbers including Directors Directors Asset managers Support functions Auditor’s remuneration Audit of the Company’s financial statements Audit of subsidiaries, pursuant to legislation Non-statutory audit fee Audit related assurance services Non-audit fees Total fees 2017 £’000 6,767 1,815 125 8,707 106 1,434 213 3,724 1,191 15,375 2017 £’000 15,375 (815) (1,191) 831 14,200 83,276 10,518 93,794 15.1% 7 21 25 53 2017 £’000 110 130 8 39 287 220 507 2016 £’000 7,431 1,263 102 8,796 125 898 213 2,815 900 13,747 2016 £’000 13,747 (870) (900) 660 12,637 54,109 14,178 68,287 18.5% 7 15 19 41 2016 £’000 60 100 40 28 228 30 258 Non-audit fees payable to the Company’s auditor are for reporting accountant services provided in respect of the move from AIM to the Main Market. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 127 127 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 7 Profit on disposal of investment properties Gross disposal proceeds Costs of disposal Carrying value Profit on disposal of investment properties 8 Finance income and expense Finance income Income from cash and short-term deposits Finance expense Interest on bank loans Interest on debt instruments Revaluation of derivatives Revaluation of derivatives previously recognised in other comprehensive income Revaluation of derivatives in the year Net finance expense 2017 £’000 10,012 (480) (8,638) 894 2017 £’000 61 (15,200) – (15,200) (1,959) (1,648) (18,746) 2016 £’000 51,109 (461) (42,349) 8,299 2016 £’000 82 (11,500) (737) (12,237) – – (12,155) During the year, all revaluation of derivatives previously recognised in other comprehensive income and accumulated in the hedge reserve have been recycled to the income statement. Interest on debt instruments related to a convertible debt instrument, which was converted during the year ended 31 March 2016. More details on the Group’s borrowings are provided in note 19. 9 Taxation UK Corporation Tax at 20% (2016: 20%) Current year Prior year Taxation The charge for the year can be reconciled to the profit per the consolidated income statement as follows: Profit before tax Tax at the current rate of 20% (2016: 20%) Revaluation of property Non-deductible expenses Other timing differences Non-taxable profit due to REIT regime Prior year adjustment Taxation 2017 £’000 923 278 1,201 2017 £’000 37,402 7,480 3,090 1,408 221 (11,276) 278 1,201 2016 £’000 136 – 136 2016 £’000 69,545 13,909 (4,800) 180 955 (10,108) – 136 As at 31 March 2017, the Group has unrecognised tax losses of £1.0 million (March 2016: £1.0 million). The losses have not been recognised as an asset due to uncertainty over the availability of taxable income to utilise the losses. The losses do not expire but are reliant on continuity of ownership and source of trade. 128 128 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Real Estate Investment Trust regime (REIT regime) The Group is a member of the REIT regime whereby profits from its UK property rental business are tax exempt. The REIT regime only applies to certain property-related profits and has several criteria which have to be met. The main criteria are: the assets of the property rental business must be at least 75% of the Group’s assets; the profit from the tax-exempt property rental business must exceed 75% of the Group’s total profit • • • at least 90% of the Group’s profit from the property rental business must be paid as dividends. The Group continues to meet these conditions and management intends that the Group should continue as a REIT for the foreseeable future. 10 Performance measures The Group’s key performance measure is ‘Funds from Operations’ or ‘FFO’. This performance measure is intended to measure the underlying profitability of the Group and as such includes realised gains on disposals and adds back expense recognised for non- cash share-based payment, unrealised gains and the one-off cost in respect of the costs of the move to the main market. The measure is not intended to replace the cash measures disclosed in the cash flow statement. The Group has previously referred to this measure as EPRA Adjusted earnings. The Group no longer discloses NAREIT FFO as a performance measure. The European Public Real Estate Association (EPRA) issued Best Practices Policy Recommendations in 2014 and additional guidance in 2016, which gives recommendations for performance measures. The EPRA earnings measure excludes investment property revaluations and gains on disposals, intangible asset movements and their related taxation. A reconciliation of the performance measures to the nearest IFRS measure is below: Profit for the year after taxation Adjustments Revaluation of investment properties Profit on disposal of investment properties Revaluation of derivatives Gain on bargain purchase Group’s share of joint ventures’ adjustments Revaluation of investment properties Loss/(profit) on disposal of investment properties Revaluation of derivatives EPRA earnings Profit on disposal of investment properties (Loss)/profit on disposal of joint ventures’ investment properties Share-based payment charge Gain on bargain purchase Exceptional cost in respect of move to the main market Funds From Operations (FFO) 2017 £’000 36,201 15,030 (894) 3,607 – 419 551 350 55,264 894 (551) 1,434 – 1,191 58,232 2016 £’000 69,409 (19,513) (8,282) – (968) (4,489) (17) – 36,140 8,282 17 808 968 900 47,115 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 129 129 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 10 Performance measures continued Number of shares Number of shares Weighted average number of ordinary shares for the purposes of Basic EPS, FFO and EPRA Effect of dilutive potential ordinary shares: Share options Deferred bonus shares Performance share plan Warrants Weighted average number of ordinary shares for the purposes of diluted EPS Performance measures (pence) Basic EPS Diluted EPS FFO per share Diluted FFO per share EPRA EPS Diluted EPRA EPS 2017 No. 000s 233,826 400 526 815 211 235,778 15.5 15.4 24.9 24.7 23.6 23.4 2016 No. 000s 176,903 1,327 – – 229 178,459 39.2 38.9 26.6 26.4 20.4 20.3 The number of shares used in the performance measures for earnings includes the weighted average of NewRiver Retail Limited’s shares up to 18 August 2016 and NewRiver REIT Plc’s shares from that date. NewRiver REIT Plc issued the same number of shares as NewRiver Retail Limited had in issue in 18 August 2016. See note 21 for further details. EPRA NAV per share and Basic NAV per share: Net assets Warrants in issue Unexercised employee awards Diluted net assets Fair value derivatives EPRA net assets 2017 Shares £’000s No’000s Pence per share 684,538 535 3,861 688,934 4,144 693,078 234,119 377 2,938 237,434 292p 290p 237,434 292p £’000s 689,867 629 4,674 695,170 2,577 697,747 No’000s Pence per share 295p 2016 Shares 233,494 420 2,740 236,654 294p 236,654 295p 11 Dividends Payment date 2017 13 May 2016 17 August 2016 28 October 2016 1 January 2017 2016 18 May 2015 31 July 2015 13 November 2015 10 February 2016 PID Non-PID Pence per share 2.75 5.00 5.00 5.00 17.75 4.25 4.50 4.50 4.75 18.00 2.00 – – – 2.00 – – – – – 4.75 5.00 5.00 5.00 19.75 4.25 4.50 4.50 4.75 18.00 £’000 11,086 11,673 11,677 11,696 46,132 5,401 5,839 8,094 8,886 28,220 The Company has a financial policy to deliver a fully covered dividend. The dividend paid during the year of £46,132,000 (March 2016: £28,220,000) is more than covered by Fund From Operations of £58,232,000 (March 2016: £47,098,000). This is further backed up by net cash flow from operations in the Group’s cash flow statement. 130 130 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 12 Investment properties Fair value brought forward Acquisitions Capital expenditure Properties acquired in business combinations Lease incentives, letting and legal costs Disposals Net valuation movement Fair value carried forward 2017 £’000 839,107 162,146 15,572 – 2,771 (8,638) (15,030) 995,928 2016 £’000 404,098 192,490 12,712 252,400 243 (42,349) 19,513 839,107 The Group’s investment properties have been valued at fair value on 31 March 2017 by independent valuer, Colliers International Valuation UK LLP, on the basis of fair value in accordance with the Current Practice Statements contained in The Royal Institution of Chartered Surveyors Valuation – Professional Standards, (the ‘Red Book’). The valuations are performed by appropriately qualified valuers who have relevant and recent experience in the sector. The fair value at 2017 represents the highest and best use. The properties are categorised as Level 3 in the IFRS 13 fair value hierarchy. There were no transfers of property between Levels 1, 2 and 3. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Information about fair value measurements for the investment property using significant unobservable inputs (Level 3) Property ERV Property rent Shopping centres High street Retail warehouse Development sites Fair value (£’000) 566,804 39,011 153,556 58,782 818,183 Min £ per sq ft 7.2 4.7 8.0 10.2 Max £ per sq ft 40.1 21.7 22.8 20.6 Average £ per sq ft 14.8 10.8 13.0 13.8 Min £ per sq ft 2.00 1.46 2.66 5.05 Max £ per sq ft 33.60 19.10 21.88 8.13 Average £ per sq ft 12.43 9.52 11.91 6.24 Property equivalent yield Average % 7.5% 6.9% 7.3% 6.9% EPRA topped up net initial yield Average % 6.8% 7.0% 6.4% 3.4% Pub portfolio Convenience store development portfolio Total Fair value (£’000) 167,335 10,440 177,775 995,928 Property Rent (£ per sq ft) EBITDA multiples / Net Initial Yield (%) EBITDA (£ per sq ft) Min – Max Average – – Min 6.5x Max 10.0x Average 7.8x Min 0.26 Max 74.67 Average 16.57 15.0 17.5 16.2 5.1% 5.3% 5.2% – – – The investments are several retail and leisure assets in the UK with a total carrying amount of £996 million. The valuation was determined using an income capitalisation method, which involves applying a yield to rental income streams. Inputs include yield, current rent and ERV. Development properties are valued using a residual method, which involves valuing the completed investment property using an investment method and deducting estimated costs to complete, then applying an appropriate discount rate. The relationship of unobservable inputs to fair value are the higher the rental values and the lower the yield, the higher the fair value. In respect of the pub portfolio the valuer makes judgements on whether to use residual value or a higher value to include development potential where appropriate. Where no conversion opportunity has been identified at present, the valuer has not specifically considered an alternative use valuation. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 131 131 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 12 Investment properties continued These inputs include: • Rental value – total rental value per annum • Equivalent yield – the discount rate of the perpetual cash flow to produce a net present value of zero assuming a purchase at the valuation • EBITDA multiples and maintainable earnings from each pub There were no changes to valuation techniques during the year. Valuation reports are based on both information provided by the Group, e.g. current rents and lease terms which is derived from the Company’s financial and property management systems and is subject to the Group’s overall control environment, and assumptions applied by the valuer, e.g. ERVs and yields. These assumptions are based on market observation and the valuer’s professional judgement. Revenues are derived from a large number of tenants with no single tenant or group under common control contributing more than 4% of the Group’s revenue. There are interrelationships between all these unobservable inputs as they are determined by market conditions. The effect of an increase in more than one unobservable input would be to magnify the impact on the valuation. The impact on the valuation will be mitigated by the interrelationship of two unobservable inputs moving in opposite directions, e.g. an increase in rent may be offset by an increase in yield, resulting in no net impact on the valuation. Expected vacancy rates may impact the yield with higher vacancy rates resulting in higher yields. 13 Investments in joint ventures Opening balance Effective disposal of investments Group’s share of profit after taxation excluding valuation movement Net valuation movement Distributions and dividends Investment in joint ventures (Losses)/gains on cash flow hedges Investments in joint ventures There are currently five joint ventures which are equity accounted for: Name NewRiver Retail Investments LP and NewRiver Retail Investments (GP) Ltd* Guernsey NewRiver Retail Property Unit Trust No.2 NewRiver Retail Property Unit Trust No.5 NewRiver Retail Property Unit Trust No.6 NewRiver Retail Property Unit Trust No.7 Jersey Jersey Jersey Jersey Country of incorporation 2017 £’000 70,125 – 5,683 (419) (6,050) 2,541 (117) 71,763 2017 % Holding 50 50 50 50 50 2016 £’000 113,027 (54,017) 8,559 4,489 (4,325) 2,266 126 70,125 2016 % Holding 50 50 50 50 50 * NewRiver Retail Investments (GP) Limited and its Limited partner (NewRiver Retail Investments LP) has a number of 100% owned subsidiaries which are NewRiver Retail (Finco No 1) Limited and NewRiver Retail (GP1) Limited, acting in its capacity as General Partner for NewRiver Retail (Holding No 1) LP and NewRiver Retail (Portfolio No 1) LP. The registered office of each of these entities is Old Bank Chambers, La Grande Rue, St Martin’s, Guernsey, Channel Islands, GY4 6RT. NewRiver Retail Property Unit Trusts No.2, No.5, No.6 and No.7 are jointly controlled Jersey property unit trusts set up by the Group and PIMCO BRAVO II Fund LP (‘BRAVO II’). The registered office of each of these entities is 13 Castle Street, Jersey JE4 5UT. The Group is the appointed asset manager on behalf of these joint ventures and receives asset management fees, development management fees and potentially performance-related bonuses. 132 132 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 All joint ventures have a 31 December year end. The aggregate amounts recognised in the consolidated balance sheet and income statement are as follows: Balance sheet Non-current assets Current assets Current liabilities Borrowings Other non-current liabilities Net assets Income statement Net property income Administration expenses Net finance costs Net valuation movement Derivative fair value movement Profit on disposal Profit after taxation Add back net valuation movement Add back derivative fair value movement Group’s share of joint ventures’ Funds From Operations 2017 Total £’000 269,280 7,617 (4,814) (128,556) – 143,527 2017 Total £’000 18,690 (1,662) (3,860) 13,168 (838) (700) (1,102) 10,528 838 700 12,066 2017 Group’s share £’000 134,640 3,809 (2,408) (64,278) – 71,763 2017 Group’s share £’000 9,345 (831) (1,930) 6,584 (419) (350) (551) 5,264 419 350 6,033 2016 Total £’000 268,324 7,724 (4,671) (130,149) (979) 140,249 2016 Total £’000 20,925 (1,173) (5,298) 14,454 8,978 – 33 23,465 (8,978) – 14,487 2016 Group’s share £’000 134,163 3,862 (2,335) (65,068) (497) 70,125 2016 Group’s share £’000 12,566 (660) (3,364) 8,542 4,489 – 17 13,048 (4,489) – 8,559 On 18 June 2015, the Group acquired 50% of the units of two joint ventures, resulting in ownership of 100% of the property unit trusts. The prior year income statement of the joint ventures includes the Group’s share of NewRiver Retail Property Unit Trust No.3 and No.4 from the period 1 April 2015 to 18 June 2015. The Group’s share of contingent liabilities in the joint ventures is £nil (March 2016: £nil). Maturity of borrowings in joint ventures Group’s share of joint venture borrowings Less than one year Between one and two years Between two and three years Less unamortised facility fees Group’s share of joint ventures’ secured borrowing Barclays Santander HSBC August 2018 February 2019 November 2019 2017 Total £’000 2017 Group’s share £’000 2016 Total £’000 2016 Group’s share £’000 – 35,170 94,000 129,170 (614) 128,556 – 17,585 47,000 64,585 (307) 64,278 Drawn £’000 13,585 4,000 47,000 64,585 12,800 27,170 91,000 130,970 (821) 130,149 Fee £’000 (47) (19) (241) (307) 6,400 13,585 45,500 65,485 (417) 65,068 Total £’000 13,538 3,981 46,759 64,278 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 133 133 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 14 Property, plant and equipment Cost At 1 April 2015 Additions At 31 March 2016 Additions Disposals At 31 March 2017 Depreciation At 1 April 2015 Depreciation charge for the year At 31 March 2016 Disposals Depreciation charge for the year At 31 March 2017 Book value at 31 March 2017 Book value at 31 March 2016 15 Trade and other receivables Trade receivables Prepayments Accrued income £’000 713 163 876 138 (286) 728 (200) (125) (325) 54 (106) (377) 351 551 2016 £’000 4,908 3,390 164 8,462 2017 £’000 3,481 1,483 409 5,373 The provision for doubtful debts was £695,000 at 31 March 2017 (31 March 2016: £566,000). 16 Derivatives The Group enters into derivative financial instruments to provide an economic hedge to its interest rate exchange risks. Further details on interest rate risks are included in note 23. These financial instruments are classified as Level 2 fair value measurements, being those derived from inputs other than quoted prices. There were no transfers between levels in the current year. The cumulative amount previously recognised in equity was recycled to the income statement. See note 8. 2017 £’000 626 – – (2,291) (160) (1,825) 2016 £’000 – 354 30 (2,960) – (2,576) Interest rate caps Non-current assets Current assets Interest rate swaps Current assets Non-current liabilities Current liabilities 134 134 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Interest rate swaps – receive floating pay fixed In less than one year In more than one year but less than two In more than two years but less than five Interest rate caps – receive floating pay fixed In less than one year In more than one year but less than two In more than two years but less than five Average contract fixed interest rate Notional principal amount 2017 % 1.9% 0.8% 1.3% – 2.1% 1.9% 2016 % 1.9% 1.0% 1.3% – – 2.8% 2017 £’000 2016 £’000 100,584 7,999 98,701 – 131,247 140,252 478,783 33,069 51,584 108,638 – – 141,499 334,790 Fair value 2017 £’000 (351) (40) (2,060) – 81 545 (1,825) 2016 £’000 (153) (356) (2,421) – – 354 (2,576) 17 Cash and cash equivalents A number of the Group’s borrowing arrangements place certain restrictions on the rent received each quarter. These do not prevent access to or use of this funding within the borrowing entities, however they do place certain restrictions on moving those funds around the wider group, typically requiring debt servicing costs to be paid before restrictions are lifted. The cash deposited under such arrangement totalled £21.2 million (March 2016: £7.1 million). 18 Trade and other payables Trade payables Other payables Accruals Rent received in advance 19 Borrowings Maturity of secured bank loans: Less than one year Between one and two years Between two and three years Between three and four years Between four and five years Unamortised loan fees Due in less than one year Due after one year 2017 £’000 2,140 3,970 12,501 10,118 28,729 2017 £’000 100,584 61,996 141,271 34,029 68,461 406,341 (3,262) 403,079 100,084 302,995 2016 £’000 2,182 3,841 10,026 9,583 25,632 2016 £’000 – – 94,658 188,433 34,029 317,120 (3,015) 314,105 – 314,105 The Group has a significant portion of borrowings that fall due within one year of the balance sheet date. The Directors are currently in advanced negotiations with the existing lenders and with some new lenders to agree facilities to refinance the existing borrowings. The Directors are confident that these bank facilities can be refinanced, or in the absence of available bank finance that the properties could be sold at a value significantly above the associate borrowing. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 135 135 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 19 Borrowings continued Secured borrowings Deka Santander/HSBC Lloyds Barclays Santander HSBC Lloyds Barclays Santander AIG Maturity date March 2018 March 2018 October 2018 December 2018 March 2019 May 2019 October 2019 March 2020 February 2021 July 2021 Facility £’000 Facility drawn £’000 Unamortised facility fees £’000 Balance £’000 49,000 51,584 28,650 32,100 60,000 24,736 63,570 52,965 34,029 83,760 480,394 49,000 51,584 – 31,996 30,000 24,736 63,570 52,965 34,029 68,461 406,341 (100) (400) – (127) (275) (203) (585) (324) (176) (1,072) (3,262) 48,900 51,184 – 31,869 29,725 24,533 62,985 52,641 33,853 67,389 403,079 Secured bank loans Bank loans are secured by way of legal charges on properties held by the Group and a hedging policy is adopted which is aligned with the property strategy on each of its assets. Convertible Unsecured Loan Stock (‘CULS’) (prior year) On 22 November 2010 the Group issued £25 million of CULS, £17 million of A CULS and £8 million of B CULS. On issue, the stockholder was able to convert all or any of the stock into Ordinary Shares at the rate of one Ordinary Share for every £2.80. The conversion rate was subsequently adjusted on the A CULS and on the B CULS as a result of new shares being issued and dividends paid in accordance with the terms of the agreement. Under the terms of the convertible, interest accrued at 5.85% on the outstanding loan stock until 31 December 2015 when it would be either converted or repaid. The interest payable on the CULS was due biannually on the 30 June and 31 December. On 18 February 2014, £1.5 million B CULS were converted at a conversion price of £2.59 representing 579,151 Ordinary shares. On 2 July 2015, £6.5 million B CULS were converted at a conversion price of £2.46 representing 2,653,061 Ordinary shares. On 25 November 2015, £17 million A CULS were converted at a conversion price of £2.43 representing 6,995,884 Ordinary shares. As at 31 March 2016, all of the CULS had been converted and no CULS are currently outstanding. 136 136 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 20 Operating lease arrangements The Group earns rental income by leasing its investment properties to tenants under non-cancellable operating leases. At the balance sheet date the Group had contracted with tenants for the following future minimum lease payments on its investment properties: Within one year Between one and two years In the second to fifth year inclusive After five years 2017 £’000 65,717 55,740 136,033 240,894 498,384 The Group’s weighted average lease length of operating leases at 31 March 2017 was 6.0 years (March 2016: 6.0 years). Operating lease payments payable by the Group were as follows: Within one year One to two years Two to five years After five years 2017 £’000 2,677 2,678 7,933 229,856 243,144 2016 £’000 74,261 64,836 114,451 157,127 410,675 2016 £’000 1,004 1,068 3,206 102,197 107,475 Operating lease obligations exist over the Group’s offices and for head leases on the Group’s retail portfolio. The increase during the year was a result of purchasing a property in London with 89 years remaining on the head lease. The expense for the year was £3.4 million (March 2016: £1.2 million). NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 137 137 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 21 Share capital and reserves Share capital During the year the Group completed its move from AIM to the premium listing segment of the official list, trading on the Main Market of the London Stock Exchange. NewRiver REIT plc became the ultimate parent company, with the former parent company, NewRiver Retail Limited, becoming a direct subsidiary of NewRiver REIT plc, in a scheme of arrangement on 18 August 2016. The principal steps of the group reorganisation were as follows: NewRiver REIT plc was incorporated in the United Kingdom on 8 June 2016 under the Companies Act 2006 as a public company. On incorporation, the share capital of NewRiver REIT plc was £50,000.02 divided into 2 ordinary shares of one pence each and 50,000 redeemable preference shares of £1 each. The preference shares were redeemed on 12 October 2016. All ordinary shares have one vote per share. There are no voting rights attached to the preference shares. All shares are fully paid. As part of a scheme of arrangement under Guernsey law, all issued ordinary shares in the capital of NewRiver Retail Limited, the former holding company of the Group, were cancelled by way of a reduction of capital on 18 August 2016. Following the cancellation of the shares, NewRiver Retail Limited issued a corresponding number of ordinary shares to the Company, such that the Company held all the issued shares in the capital of NewRiver Retail Limited. The Company has, in turn, issued ordinary shares to the former shareholders of NewRiver Retail Limited on a one-for-one basis. The result of the share cancellation and share issue is that the Company is now the ultimate parent company of the Group. On 18 August 2016, the Company issued 238,588,536 ordinary shares with a nominal value of one pence each to the former shareholders. The Company formed a new Employee Benefit Trust (EBT) and the shares previously held by the EBT of NewRiver Retail Limited were transferred to the new EBT of the Company. Number issued 000’s Price per share pence Total 000’s Held by EBT 000’s Ordinary shares NewRiver Retail Limited: As at 1 April 2015 Shares issued under employee share schemes Conversion of convertible debt Issuance of equity Warrant conversion Granted to Employee Benefit Trust As at 31 March 2016 Warrant exercise Exercise of share options Shares issued under employee share schemes Number of shares in issue at time of scheme of arrangement NewRiver REIT plc: Issued upon incorporation Issued pursuant to scheme of arrangement Exercise of share options Shares issued under employee share schemes NewRiver REIT plc: Issued upon incorporation Issued pursuant to scheme of arrangement Exercise of share options 138 138 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 345 9,648 96,154 168 5,000 44 12 65 – 238,588 328 133 – 243 313 154 – 148 250 – 1 1 240 – Shares in issue 000’s 127,078 127,423 137,071 233,225 233,393 233,393 233,393 233,437 233,449 233,514 127,575 127,575 137,223 233,377 233,545 238,545 238,545 238,589 238,589 238,589 497 152 152 152 152 5,152 5,152 5,152 5,140 5,075 238,589 5,075 233,514 – 238,589 238,589 238,589 238,589 Share capital £’000 – 2,335 5 2,340 – 5,075 4,747 4,614 4,614 Share premium £’000 – – 1,691 1,691 – 233,514 233,842 233,975 233,975 Total £’000 – 2,335 1,696 4,031 Warrants Shareholders who subscribed for placing shares in the original share listing of NewRiver Retail Limited’s shares received warrants, in aggregate, to subscribe for 3% of the fully diluted share capital. The subscription price is adjusted following the payment of dividends or share issuance and was 142p as at 31 March 2017. 377,000 remain outstanding (31 March 2016: 420,000). Other reserves Other reserves consisted of distributable reserves created upon the issue of share capital by NewRiver Retail Limited. Upon the scheme of arrangement becoming effective the distributable reserves have been presented within retained earnings. Share option reserve Share option reserve consisted of the cumulative charge in relation to NewRiver Retail Limited’s employee share schemes. Upon the scheme of arrangement becoming effective and new share schemes being issued under the Company, the cumulative charge has been reclassified to retained earnings along with the related charge from the income statement. Revaluation reserves Revaluation reserves represented the unrealised retained earnings recognised based on the new movement in fair value of the Group’s investment properties. During the year the charge has been reclassified to retained earnings to be consistent with other investment property companies. Merger reserve The merger reserve arose as result of the scheme of arrangement and represents the nominal amount of share capital that was issued to shareholders of NewRiver Retail Limited. Hedging reserve The hedging reserve consists of the fair value movement of interest rate derivatives that are in an effective cash flow hedging relationship. Retained earnings Retained earnings consist of the accumulated net profit of the Group, less dividends paid from distributable reserves, and transfers from equity issues where those equity issues generated distributable reserves. Dividends are paid from the Company’s distributable reserves which were approximately £88 million at 31 March 2017. Shares held in Employee Benefit Trust (EBT) As part of the scheme of arrangement and group reorganisation, the Company established an EBT which is registered in Jersey. The EBT, at its discretion, may transfer shares held by it to directors and employees of the Company and its subsidiaries. The maximum number of ordinary shares that may be held by the EBT may not exceed 10% of the Company’s issued share capital. It is intended that the EBT will not hold more ordinary shares than are required in order to satisfy share options granted under employee share incentive plans. There are currently 4,613,717 ordinary shares held by the EBT: Transferred under scheme of arrangement Shares issued under employee share schemes As at 31 March 2017 Number 000’s 5,152 (538) 4,614 Value £’000 16,955 (1,771) 15,184 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 139 139 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 22 Share-based payments The Group has three share schemes for employees. • Share option scheme • Performance Share Scheme • Deferred bonus scheme Share option scheme Options were granted between 2009 and 2011. The options were priced at the share price at date of issue. No options were granted in 2017 or 2016. The charge for the year recognised in the income statement was nil (March 2016: nil). Year issued 2010 2011 2012 Average exercise price Outstanding at start of year 2.54 2.44 2.35 606,312 30,000 1,300,000 1,936,312 Granted – – – – Exercised (38,693) (15,000) (286,000) (339,693) Lapsed – – – – Outstanding at end of year 567,619 15,000 1,014,000 1,596,619 Number exercisable 567,619 15,000 1,014,000 1,596,619 Average remaining life (years) 5.4 5.7 7.5 Performance Share Scheme Zero priced share options have been issued to senior management and executive directors under the Performance Share Scheme since 2013. The options vest rules to the extent that performance conditions are met over a three or four-year period. At the end of the period there may be a further vesting condition that the employee or director remains an employee of the Group. Further details on the scheme and the performance conditions is provided in the Remuneration Report. The charge for the year recognised in the income statement was £807,000 (March 2016: £898,000). Year issued Average exercise price Outstanding at start of year Granted Exercised Lapsed Outstanding at end of year Number exercisable Average remaining life (years) 2013 2014 2015 2016 2017 200,067 – 122,457 – 652,637 – 1,123,816 – – – 2,098,977 – 1,655 39,404 66,814 1,152,758 1,260,631 (56,192) (124,112) (11,238) (10,212) – (201,754) – – (16,321) (81,927) (26,184) (124,432) 143,875 – 664,482 1,098,491 1,126,574 3,033,422 143,875 – – – – 143,875 5.8 – 7.3 8.5 9.3 Deferred Bonus Scheme Zero priced share options have been issued to senior management and executive directors under the Deferred Bonus Scheme since 2016. The options vest based on the employee or director remaining in the employment of the Group for a defined period (usually two years). The charge for the year recognised in the income statement for this scheme was £627,000 (March 2016: nil). Year issued 2016 2017 Average exercise price – – Outstanding at start of year 626,640 – 626,640 Granted 39,520 191,178 230,698 Exercised – – – Lapsed – – – Outstanding at end of year 666,160 191,178 857,338 Number exercisable – – – Average remaining life (years) 1.8 2.2 Fair value The fair value of the share options has been calculated based on a Monte Carlo Pricing Model using the following inputs: Share price Exercise price Expected volatility Risk free rate Expected dividends* * based on quoted property sector average. 140 140 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 2017 2.6875 – 3.34 Nil 17.0% 0.2255% – 0.5301% 6.00% – 7.00% 2016 3.3275 Nil 16.0% 0.9307% 5.10% 23 Financial instruments and risk management The Group’s activities expose it to a variety of financial risks in relation to the financial instruments it uses: market risk including cash flow interest rate risk, credit risk and liquidity risk. The financial risks relate to the following financial instruments: trade receivables, cash and cash equivalents, trade and other payables, borrowings and derivative financial instruments. Risk management parameters are established by the Board on a project-by-project basis. Reports are provided to the Board quarterly and also when authorised changes are required. Financial instruments Financial assets Designated as held for trading Interest rate caps Designated in a hedging relationship Interest rate caps Loans and receivables Trade and other receivables Cash and cash deposits Financial liabilities Designated as held for trading Interest rate swaps Designated in a hedging relationship Interest rate swaps At amortised cost Borrowings Payables and accruals Valuation level 2017 £’000 2016 £’000 2 2 2 2 626 – 3,481 45,956 50,063 – 354 4,908 114,071 119,333 (2,451) – – (2,930) (403,079) (18,611) (424,141) (374,078) (314,105) (16,049) (333,084) (213,751) Market risk Currency risk The Group is not subject to any foreign currency risk as nearly all transactions are in Pounds Sterling. Interest rate risk The Group’s interest rate risk arises from borrowings issued at floating interest rates (see note 19). The Group’s interest rate risk is reviewed quarterly by the Board. The Group manages its exposure to interest rate risk on borrowings through the use of interest rate derivatives (see note 16). Interest rate caps and interest rate swaps are used to both mitigate the risk of an increase in interest rates but also to allow the Group to benefit from a fall in interest rates. 51% of the Group’s interest rate exposure is fixed and the remainder is capped. The Group has employed an external adviser when contracting hedging to advise on the structure of the hedging. Sensitivity analysis is carried out to assess the impact of an increase in interest rates on finance costs to the Group. Management consider that a significant movement in interest rates would by 200 bps and have therefore carried out sensitivity analysis of the impact of such a movement. The impact of a 200 bps increase in interest rates for the year would increase the net interest payable in the income statement and reduce net assets by £6.2 million (March 2016: £0.6 million). The impact of a 200 bps decrease in interest rates for the year would reduce the net interest payable in the income statement and increase net assets by £7.7 million (March 2016: £0.7 million). The directors consider this to be a reasonable sensitivity given historic interest rates and the possibility for short term swings in rates. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 141 141 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 23 Financial instruments and risk management continued Market risk continued Credit risk The Group’s principal financial assets are cash, trade receivables and other receivables. The Group manages its credit risk through policies to ensure that rental contracts are made with tenants meeting appropriate balance sheet covenants, supplemented by rental deposits or bank guarantees from international banks. The amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is objective evidence that the Group will not be able to collect all amounts due according to the terms of the receivables concerned. The Group’s monitors its counterparty exposures on cash and short-term deposits weekly. The Group monitors the counterparty credit rating of the institutions that hold its cash and deposits and spread the exposure across several banks. The Group’s maximum exposure to credit risk as at 31 March 2017 was £49 million (31 March 2016: £119 million). Liquidity risk The Group manages its liquidity risk by maintaining sufficient cash balances and committed credit facilities. The Board reviews the credit facilities in place on a project-by-project basis. Management monitor the Group’s liquidity position weekly. Cash flow reports are issued weekly and are reviewed quarterly by the Board. A summary table with maturity of financial liabilities is presented below: 2017 Borrowings Interest on borrowings Interest rate swaps Payables and accruals 2016 Borrowings Interest on borrowings Interest rate swaps Payables and accruals Less than one year (100,584) (11,215) (1,372) (18,611) (131,782) – (10,539) (1,372) (16,049) (27,960) One to two years (61,996) (8,901) (1,056) – (71,953) – (9,807) (1,056) – (10,863) Two to five years (243,761) (10,717) (960) – (255,438) (283,091) (13,746) (960) – (297,797) More than five years – – – – – (34,029) – – – (34,029) Total (406,341) (30,833) (3,388) (18,611) (459,173) (317,120) (34,092) (3,388) (16,049) (370,649) The Group has a significant portion of borrowings that fall due within one year of the balance sheet date. The Directors are currently in advanced negotiations with the existing lenders and with some new lenders to agree facilities to refinance the existing borrowings. The Directors are confident that these bank facilities can be refinanced, or in the absence of available bank finance that the properties could be sold at a value significantly above the associate borrowing. 142 142 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Reconciliation of movement in the Group’s share of net debt in the year Group’s share of net debt at beginning of year Cash flow Net (increase)/decrease in cash and cash equivalents New bank loans raised (net of expenses) Borrowings acquired in business combinations Bank loans repaid Group’s share of joint ventures’ cash flow Net (increase)/decrease in cash and cash equivalents New bank loans raised (net of expenses) Bank loans repaid Borrowings disposed of Other Amortisation of bank loan fees Group’s share of joint ventures’ amortisation of bank loan fees Group’s share of net debt 2017 £’000 261,673 68,115 153,630 – (65,943) (95) 1,500 (2,400) – 1,184 213 417,877 2016 £’000 248,815 (98,659) 65,311 94,811 – (2,267) – – (47,406) 881 187 261,673 Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide returns to shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Group is not subject to any external capital requirements. As detailed in note 9, the Group is a REIT and to qualify as a REIT the Group must distribute 90% of its taxable income from its property business. To maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the Group monitors capital on the basis of its gearing ratio. This ratio is calculated as net debt divided by equity. Net debt is calculated as total borrowings, less cash and cash equivalents. Net debt to equity ratio Borrowings Cash and cash equivalents Net debt Equity attributable to equity holders of the parent Net debt to equity ratio (‘Balance sheet gearing’) Share of joint ventures’ borrowings Share of joint ventures’ cash and cash equivalents Group’s share of net debt Carrying value of investment properties Share of joint ventures’ carrying value of investment properties Group’s share of carrying value of investment properties Net debt to property value ratio (‘Loan to value’) 2017 £’000 403,079 (45,956) 357,123 684,538 52% 64,278 (3,524) 417,877 995,928 134,640 1,130,568 37% 2016 £’000 314,105 (114,071) 200,034 689,867 29% 65,068 (3,429) 261,673 839,107 134,163 973,270 27% NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 143 143 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 24 Contingencies and commitments The Group has no material contingent liabilities (2016: None). The Group was contractually committed to £1.9 million of capital expenditure to construct or develop investment property as at 31 March 2017 (31 March 2016: £6.4million). 25 Related party transactions Transactions between the Company and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Management fees are charged to join ventures for asset management, investment advisory, project management and accounting services. Total fees charged were: NewRiver Retail Investments LP NewRiver Retail Property Unit Trust NewRiver Retail Property Unit Trust No.2 NewRiver Retail Property Unit Trust No.3 NewRiver Retail Property Unit Trust No.4 NewRiver Retail Property Unit Trust No.5 NewRiver Retail Property Unit Trust No.6 NewRiver Retail Property Unit Trust No.7 The amounts outstanding at each year end were: NewRiver Retail Investments LP NewRiver Retail Property Unit Trust No.2 NewRiver Retail Property Unit Trust No.5 NewRiver Retail Property Unit Trust No.6 NewRiver Retail Property Unit Trust No.7 2017 £’000 111 – 207 – – 199 202 97 2017 £’000 27 62 59 55 29 2016 £’000 108 (96) 168 42 (24) 155 210 86 2016 £’000 38 43 36 55 29 Total emoluments of key management during the year are disclosed in the remuneration report. 26 Post balance sheet events On 11 May 2017, the Company paid dividends of £11.6 million. The total dividend of 5.0 pence per share was paid as a PID. The first quarter dividend in relation to the year ended 31 March 2018 will be increased to 5.25 pence per share (March 2017: 5.00 pence per share), will be paid on 4 August 2017 to shareholders on the register on 16 June 2017. The ex-dividend date will be 15 June 2017. The Board has approved a special dividend of 3.00 pence per share to be paid on 4 August 2017 to shareholders on the register on 16 June 2017. The ex-dividend date will also be 15 June 2017. 144 144 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 COMPANY BALANCE SHEET AS AT 31 MARCH 2017 Non-current assets Investment in subsidiaries Total assets Current assets Amounts owed from subsidiary undertakings Other receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Current liabilities Accruals Total current liabilities Net assets Equity Share capital Share premium Merger reserve Retained earnings Total equity Notes B 2017 £’000 415,465 415,465 88,473 50 1,716 90,239 505,704 (645) (645) 505,059 2,340 1,691 413,180 87,848 505,059 The notes form an integral part of the Company financial statements. The Company has applied the exemption in s408 of the Companies Act for omitting the income statement of the parent company. The profit for the period after taxation was £221,000. The financial statements were approved by the Board of Directors on 15 May 2017 and were signed on its behalf by: David Lockhart Chief Executive Mark Davies Chief Financial Officer NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 145 145 FINANCIAL STATEMENTS STATEMENT OF CHANGES IN EQUITY AS AT 31 MARCH 2017 As at incorporation on 8 June 2016 Profit after taxation Group reorganisation Exercise of share options Transfer between reserves Dividends paid As at 31 March 2017 Share capital £’000 – – 2,335 5 – – 2,340 Share premium £’000 – – – 1,691 – – 1,691 Merger reserve £’000 – – 524,180 – (111,000) – 413,180 Retained earnings £’000 – 221 – – 111,000 (23,373) 87,848 Total £’000 – 221 526,515 1,696 – (23,373) 505,059 The notes form an integral part of these financial statements. There was no other income in the period therefore the profit after taxation is the Company’s total comprehensive income for the period. Retained earnings reflects the Company’s distributable reserves. 146 146 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 NOTES TO THE COMPANY’S FINANCIAL STATEMENTS A. Accounting policies Basis of accounting The Company’s separate financial statements for the period ended 31 March 2017 are prepared in accordance with Financial Reporting Standard 101 (FRS 101) “Reduced Disclosure Framework” as issued by the Financial Reporting Council. The financial statements are presented in pounds Sterling. These financial statements have been prepared under the historical cost convention. The preparation of financial statements requires the use of certain critical accounting estimates. It also requires the Directors to exercise judgement in the process of applying the Company’s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. The Directors believe that the underlying assumptions are appropriate. The most critical estimates, assumptions and judgements relate to the determination of carrying value of the investment in the Company’s subsidiary undertaking. The nature, facts and circumstance of the investment are taken into account on assessing whether there are any indications of impairment. Disclosure exemptions The Company has taken advantage of all disclosure exemptions allowed by FRS 101. These financial statements do not include: • certain disclosures regarding the Company’s capital; • a statement of cash flows; • certain disclosures in respect of financial instruments; • • disclosure of related party transactions with wholly-owned members of the Group. the effect of future accounting standards not yet adopted; and The above disclosure exemptions have been adopted because equivalent disclosures are included in the consolidated Group accounts into which the Company is consolidated. Dividends Dividend information is provided in note 11 to the consolidated accounts. Investment in subsidiaries Investments in subsidiary undertakings are stated at cost less provision for impairment. Financial instruments Financial assets Financial assets consist of loans and receivables. The Group determines the classification of its financial assets at initial recognition. Financial assets are initially measured at fair value plus directly attributable transaction costs. The Group’s financial assets consist of cash, and loans and receivables. Financial assets are derecognised only when the contractual rights to the cash flows from the financial asset expire or the Company transfers substantially all risks and rewards of ownership. The Company assesses at each financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence (such as significant financial difficulty of the obligor, breach of contract, or it becomes probable that the debtor will enter bankruptcy), the asset is tested for impairment. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (that is the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through use of an allowance account. The amount of the loss is recognised in profit and loss. If in a subsequent period the amount of the impairment loss decreased and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent that the carrying value of the asset does not exceed its amortised costs at the reversal date. Financial liabilities Financial liabilities are classified as other liabilities. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. All loans and borrowings are classified as other liabilities. Initial recognition is at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised costs using the effective interest method. Financial liabilities included in trade and other payables are recognised initially at fair value and subsequently at amortised cost. The fair value of a non-interest bearing liability is its discounted repayment amount. If the due date of the liability is less than one year, discounting is omitted. NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 147 147 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED A. Accounting policies continued Share-based payments The cost of equity settled transactions is measured with reference to the fair value at the date at which they were granted. Where vesting performance conditions are non-market based, the fair value excludes the effect these vesting conditions and an estimate is made at each balance sheet date of the number of instruments expected to vest. The fair value is recognised over the vesting period in the income statement of the company that employs the recipient of the share-based payment, with a corresponding increase in equity. The Company increases the carrying value of the subsidiary by the value of the share-based payment. Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. Dividends Dividends to the Company’s shareholders are recognised when they become legally payable. In the case of interim dividends, this is when paid. In the case of final dividends, this is when approved by equity holders at a general meeting. Merger reserve The merger reserve resulted from the acquisition of NewRiver Retail Limited and represents the difference between the value of the net assets acquired of £526 million and the nominal value of the shares issued of 239 million, less the impairment in NewRiver Retail Limited following the payment of a dividend to the Company of £111 million. 148 148 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 B. Investment in subsidiaries All subsidiaries were acquired by way of the group reorganisation, as detailed in note 1. All subsidiaries are held indirectly expect NewRiver Retail Limited, the former ultimate parent of the Group. Country of incorporation UK UK UK UK UK UK UK UK Jersey UK Jersey UK UK UK UK UK UK UK UK Guernsey UK Guernsey UK UK UK Guernsey Guernsey UK Name C Store REIT Limited Convenience Store REIT Limited NewRiver Retail (Burgess Hill) Limited NewRiver (Darnall) Limited NewRiver Group Limited NewRiver REIT (UK) Limited NewRiver Leisure Limited NewRiver Retail (Bexleyheath) Holdings Limited NewRiver Retail (Bexleyheath) Limited NewRiver Retail (Boscombe No. 1) Limited NewRiver Retail (Broadway Square) Limited NewRiver Retail (Broadway Square) Limited NewRiver Retail (Cardiff) Limited NewRiver Retail (Carmarthen) Limited NewRiver Retail (Colchester) Limited NewRiver Retail (Darlington) Limited NewRiver Retail (GP3) Limited NewRiver Retail (Leylands Road) Limited NewRiver Retail (Mantle) Limited NewRiver Retail (Market Deeping No. 1) Limited NewRiver Retail (Morecambe) Limited NewRiver Retail (Newcastle No. 1) Limited NewRiver Retail (Nominee No.3) Limited NewRiver Retail (Paisley) Limited NewRiver Retail (Penge) Limited NewRiver Retail (Portfolio No. 1) Limited NewRiver Retail (Portfolio No. 2) Limited NewRiver Retail (Portfolio No. 3) Limited NewRiver Retail (Portfolio No. 3) Limited UK Partnership UK NewRiver Retail (Portfolio No. 4) Limited UK NewRiver Retail (Portfolio No. 5) Limited UK NewRiver Retail (Portfolio No. 6) Limited UK NewRiver Retail (Portfolio No. 8) Limited UK NewRiver Retail (Ramsay Development) Limited UK NewRiver Retail (Ramsay Investment) Limited NewRiver Retail (Skegness Developments) Limited UK UK NewRiver Retail (Skegness) Limited UK NewRiver Retail (Wakefield) Limited UK NewRiver Retail (Warminster) Limited UK NewRiver Retail (Wisbech) Limited UK NewRiver Retail (Witham No. 1) Limited Guernsey NewRiver Retail (Wrexham No. 1) Limited UK NewRiver Retail Academy Limited Activity Dormant company Dormant company Dormant company Real estate investments Real estate investments Asset management Real estate investments Group holding company Real estate investments Real estate investments Real estate investments Dormant company Real estate investments Real estate investments Real estate investments Real estate investments General partner Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Dormant company Real estate investments Real estate investments Real estate investments Real estate investments Holding company Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Real estate investments Dormant company Proportion of ownership interest 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Class of share Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Partnership Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 149 149 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED B. Investment in subsidiaries continued Name NewRiver Retail CUL No. 1 Limited NewRiver Retail Holdings Limited NewRiver Retail Holdings No. 1 Limited NewRiver Retail Holdings No. 2 Limited NewRiver Retail Holdings No. 3 Limited NewRiver Retail Holdings No. 4 Limited NewRiver Retail Holdings No. 5 Limited NewRiver Retail Holdings No. 6 Limited NewRiver Retail Holdings No. 7 Limited NewRiver Retail Limited NewRiver Retail Property Unit Trust NewRiver Retail Property Unit Trust No. 3 NewRiver Retail Property Unit Trust No. 4 Pub REIT Limited Shopping Centre REIT Limited Country of incorporation UK Guernsey Guernsey Guernsey Guernsey Guernsey Guernsey Guernsey Guernsey Guernsey Jersey Jersey Jersey UK UK Activity Dormant company Group holding company Group holding company Group holding company Group holding company Group holding company Group holding company Group holding company Group holding company Group holding company Real estate investments Real estate investments Real estate investments Dormant company Dormant company Proportion of ownership interest 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Class of share Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary units Ordinary units Ordinary units Ordinary Shares Ordinary Shares The Company’s investment in joint venture entities is detailed in note 13. The registered offices of the companies are: UK – 37 Maddox Street, London, W1S 2PP Jersey – 13 Castle Street, Jersey JE4 5UT Guernsey – Old Bank Chambers, La Grande Rue, St Martin’s, Guernsey, Channel Islands, GY4 6RT Reconciliation of the movement in investment in subsidiaries: Opening balance Subsidiary acquired in scheme of arrangement Impairment of subsidiary due to dividend received Investment in subsidiaries C. Auditors remuneration The auditors’ remuneration in respect of the Company is disclosed in note 6. D. Average staff numbers The average number of staff employed by the Company’s subsidiaries was: Directors Asset managers Support functions The staff costs of the staff employed by the Company’s subsidiaries were: Wages and salaries Social security costs Other pension costs Staff costs 2017 £’000 – 526,465 (111,000) 415,465 2016 7 15 19 41 2016 £’000 7,431 1,263 102 8,796 2017 7 21 25 53 2017 £’000 6,767 1,815 125 8,707 The Company itself has no direct employees. The Directors emoluments are disclosed in the remuneration report. 150 150 NewRiver REIT plc Annual Report and Accounts 2017 NewRiver REIT plc Annual Report and Accounts 2017 Glossary Admin cost ratio: Is the Group’s share of net administrative expenses (including its share of JV administrative expenses) divided by the Group’s share of property income (including its share of JV property income). Assets under Management (AUM): Is a measure of the total market value of all properties managed by the Group. Balance sheet gearing: Is the balance sheet net debt divided by IFRS net assets. Book value: Is the amount at which assets and liabilities are reported in the financial statements. BREEAM: (Building Research Establishment Environmental Assessment Method) assesses the sustainability of buildings against a range of social and environmental criteria. Capital return: Is calculated as the change in capital value less any capital expenditure expressed as a percentage of capital employed over the period. Capped rents: Are rents subject to a maximum level of uplift at the specified rent reviews as agreed at the time of letting. Collared rents: Are rents subject to a minimum level of uplift at the specified rent reviews as agreed at the time of letting. Dividend cover: Funds From Operations per share divided by dividend per share declared in the period. EPRA: Is the European Public Real Estate Association. EPRA earnings: Is the IFRS profit after taxation excluding investment property revaluations and gains/losses on disposals. EPRA net assets (EPRA NAV): Are the balance sheet net assets excluding the mark to market on effective cash flow hedges and related debt adjustments, deferred taxation on revaluations and diluting for the effect of those shares potentially issuable under employee share schemes. EPRA NAV per share: Is EPRA NAV divided by the diluted number of shares at the period end. Equivalent yield: Is the net weighted average income return a property will produce based upon the timing of the income received. In accordance with usual practice, the equivalent yields (as determined by the external valuers) assume rent received annually in arrears and on values before deducting prospective purchaser’s costs. ERV growth: Is the change in ERV over a period on our investment portfolio expressed as a percentage of the ERV at the start of the period. ERV growth is calculated monthly and compounded for the period subject to measurement, as calculated by MSCI Real Estate (formerly named IPD). Estimated rental value (ERV): Is the external valuers’ opinion as to the open market rent which, on the date of valuation, could reasonably be expected to be obtained on a new letting or rent review of a property. Exceptional item: Is an item of income or expense that is deemed to be sufficiently material, either by its size or nature, to require separate disclosure and is one off in nature. Fair value in relation to property assets: Is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s‑length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion (as determined by the Group’s external valuers). In accordance with usual practice, the Group’s external valuers report valuations net, after the deduction of the prospective purchaser’s costs, including stamp duty land tax, agent and legal fees. Footfall: Is the annualised number of visitors entering our shopping centre assets. Funds From Operations: Is a measure of cash profits which includes realised recurring cash profits, realised cash profits or losses on the sale of properties and excludes other one off or non‑cash adjustments. Group: Is NewRiver REIT plc, the Company and its subsidiaries and its share of joint ventures (accounted for on an equity basis). Head lease: Is a lease under which the Group holds an investment property. IAS/IFRS: Is the International Financial Reporting Standards issued by the International Accounting Standards Board and adopted by the EU. Income return: Is the income derived from a property as a percentage of the property value. Interest cover: Is the number of times net interest payable is covered by underlying profit before net interest payable and taxation. Interest-rate swap: Is a financial instrument where two parties agree to exchange an interest rate obligation for a predetermined amount of time. These are used by the Group to convert floating‑rate debt obligation or investments to fixed rates. MSCI Real Estate: MSCI Real Estate (formerly Investment Property Databank Ltd or ‘IPD’) produces independent benchmarks of property returns and NewRiver portfolio returns. Joint venture: Is an entity in which the Group holds an interest on a long‑term basis and is jointly controlled by the Group and one or more ventures under a contractual arrangement whereby decisions on financial and operating policies essential to the operation, performance and financial position of the venture require each joint venture partner’s consent. Leasing Events: Long‑term and temporary new lettings, lease renewals and lease variations within investment and joint venture properties. LIBOR: Is the London Interbank Offered Rate, the interest rate charged by one bank to another for lending money. Like-for-like ERV growth: Is the change in ERV over a period on the standing investment properties expressed as a percentage of the ERV at the start of the period. Like-for-like footfall growth: Is the movement in footfall against the same period in the prior year, on properties owned throughout both comparable periods, aggregated at 100% share. NewRiver REIT plc Annual Report and Accounts 2017 151 GLOSSARY CONTINUED Like-for-like net rental income: Is the change in net rental income on properties owned throughout the current and previous periods under review. This growth rate includes revenue recognition and lease accounting adjustments but excludes properties held for development in either period, properties with guaranteed rent reviews, asset management determinations and surrender premiums. Loan to Value (LTV): Is the ratio of gross debt less cash, short‑term deposits and liquid investments to the aggregate value of properties and investments. LTV is expressed on a proportionally consolidated basis. Mark to market: Is the difference between the book value of an asset or liability and its market value. Net asset value (NAV) per share: Is the equity attributable to owners of the Group divided by the number of Ordinary Shares in issue at the period end. Net equivalent yield: Is the weighted average income return (after adding notional purchaser’s costs) a property will produce based upon the timing of the income received. In accordance with usual practice, the equivalent yields (as determined by the external valuers) assume rent is received annually in arrears. Net initial yield: Is the current annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchaser’s costs. Net rental income: Is the rental income receivable in the period after payment of ground rents and net property outgoings. Net rental income will differ from annualised net rents and passing rent due to the effects of income from rent reviews, net property outgoings and accounting adjustments for fixed and minimum contracted rent reviews and lease incentives. NRR share: Represents the Group’s ownership on a proportionally consolidated basis. Occupancy rate: Is the estimated rental value of let units expressed as a percentage of the total estimated rental value of the portfolio, excluding development properties. Passing rent: Is the gross rent, less any ground rent payable under head leases. Pre-let: A lease signed with an occupier prior to the completion of a development. Property Income Distribution (PID): As a REIT the Group is obliged to distribute 90% of the tax exempt profits. These dividends, which are referred to as PIDs, are subject to withholding tax at the basic rate of income tax. Certain classes of shareholders may qualify to receive the dividend gross. See our website (www.nrr.co.uk) for details. The Group can also make other normal (non‑PID) dividend payments which are taxed in the usual way. 152 NewRiver REIT plc Annual Report and Accounts 2017 Real Estate Investment Trust (REIT): Is a listed property company which qualifies for and has elected into a tax regime, which exempts qualifying UK property rental income and gains on investment property disposals from corporation tax. Rental value growth: Is the increase in the current rental value, as determined by the Company’s valuers, over the 12‑month period on a like‑for‑like basis. Reversion: Is the increase in rent estimated by the external valuers, where the passing rent is below the estimated rental value. The increases to rent arise on rent reviews, letting of vacant space and expiry of rent‑free periods. Reversionary yield: Is the anticipated yield, which the initial yield will rise to once the rent reaches the estimated rental value. Tenant (or lease) incentives: Are any incentives offered to occupiers to enter into a lease. Typically the incentive will be an initial rent‑free period, or a cash contribution to fit‑out or similar costs. Under accounting rules the value of lease incentives given to tenants is amortised through the Income Statement on a straight‑line basis to the lease expiry. Total Accounting Return (TAR): Is the increase or decrease in EPRA NAV per share plus dividends paid, and this can be expressed as a percentage of EPRA NAV per share at the beginning of the period. Total Property Return (TPR): Is calculated as the change in capital value, less any capital expenditure incurred, plus net income, expressed as a percentage of capital employed over the period, as calculated by MSCI Real Estate (formerly IPD). Total property returns are calculated monthly and indexed to provide a return over the relevant period. Total Shareholder Return (TSR): Is calculated by the growth in capital from purchasing a share in the Company assuming that the dividends are reinvested each time they are paid. Voids: Are expressed as a percentage of ERV and represent all unlet space, including voids where refurbishment work is being carried out and voids in respect of pre‑development properties. Temporary lettings of up to 12 months are also treated as voids. Weighted average debt maturity: Is measured in years when each tranche of Group debt is multiplied by the remaining period to its maturity and the result is divided by total Group debt in issue at the period end. Weighted average interest rate: Is the Group loan interest and derivative costs pa at the period end, divided by total Group debt in issue at the period end. Weighted average lease expiry (WALE): Is the average lease term remaining to first break, or expiry, across the portfolio weighted by rental income. This is also disclosed assuming all break clauses are exercised at the earliest date, as stated. Excludes short‑term licences and residential leases. Yield on cost: Passing rents expressed as a percentage of the total development cost of a property. Yield shift: Is a movement (usually expressed in basis points) in the equivalent yield of a property asset. Company information Directors Paul Roy (Non-Executive Chairman) David Lockhart (Chief Executive) Mark Davies (Chief Financial Officer) Allan Lockhart (Property Director) Kay Chaldecott (Non-Executive Director) Alastair Miller (Non-Executive Director) Company Secretary Matthew Jones Registered office 37 Maddox Street London W1S 2PP Company Number 10221027 Brokers Liberum Capital Limited Ropemaker Place, Level 12 25 Ropemaker Street London EC2Y 9LY Peel Hunt LLP Moore House 120 London Wall London EC27 5ET Financial adviser Kinmont 5 Clifford Street London W1S 2LG Auditor Deloitte LLP Regency Court Glategny Esplanade St. Peter Port Guernsey GY1 3HW Legal advisers Eversheds Sutherland (International) LLP One Wood Street London EC2V 7WS DWF LLP 5 St Paul’s Square Old Hall Street Liverpool L3 9AE Tax advisers BDO LLP 55 Baker Street London W1U 7EU Registrar Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Designed and produced by Black Sun Plc www.blacksunplc.com FSC® – Forest Stewardship Council®. This guarantees that the paper comes from well managed forests and other controlled sources through to the finished document in the printing factory. N e w R i v e r R E I T p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 7 www.nrr.co.uk NewRiver REIT plc 37 Maddox Street London W1S 2PP +44 (0) 20 3328 5800